Ratings agency, Moody’s has warned that Eskom’s independent inquiry is credit negative.
The ratings agency made the comment in response to the power utility’s recent announcement that it will commission an independent inquiry on the current status of the business and its challenges.
(READ MORE: Eskom pulls the plug on CEO & top brass)
As a result, four senior executives of Eskom, including the chief executive and finance director, stepped aside for the time of the inquiry, which could last up to three months.
The inquiry will focus on the poor performance of generation plants, delays in bringing the new generation plants on-stream, the high costs of primary energy and the cash flow challenges experienced by Eskom.
“Whilst Moody’s understands that there are no charges against the executives and no accusation of wrongdoing, the inquiry is credit negative for Eskom because it may affect investor sentiment,” Moody’s said in a statement.
“Investor sentiment was key for the company given the need to access the debt capital markets to fund a very significant investment programme and refinance debt maturities. Eskom’s liquidity position, which has been structurally weak, is currently supported by the proceeds from the issuance in February 2015 of 1.25 billion US dollarsnotes due 2025.”
Moody’s said it noted challenges highlighted were not new and are factored into the company’s standalone credit quality or Baseline Credit Assessment (BCA) of b3.
“In accordance with Moody’s rating methodology for government-related issuers (GRIs), Eskom’s current Ba1 rating continues to be based on the agency’s expectation of high probability of support from the government of South Africa (Baa2 stable), reflecting the company’s critical role as supplier of substantially all electricity used within the country,” read the statement.
(READ MORE: Eskom does not need an inquiry)
Moody’s expectation of high support is evidenced by the direct financial assistance provided in the past, including the government’s 350 billion rand Guarantee Framework Agreement, a subordinated loan amounting to 60 billion rand and, more recently, the package of solutions announced in September 2014, including an equity injection of 23 billion rand.
The government confirmed recently that the first 10 billion rand tranche would be injected by June 2015 and a second 10 billion rand tranche by year-end 2015.