Eskom ratings upgraded after bailout

Moody’s Investors Service upgraded Eskom’s long-term corporate family rating (CFR) to B2 from Caa1 today but changed the utility’s outlook from positive to stable.

A B2 rating still falls under Moody’s non-investment grade category but means Eskom has “speculative elements and is subject to substantial credit risk”.

However, this is still an upgrade from a Caa1 rating, under which the utility is “judged to be of poor standing and is subject to very high credit risk”.

Moody’s has also upgraded Eskom’s probability of default (PDR) rating to B2-PD from Caa2-PD, its Baseline Credit Assessment (BCA) to caa1 from caa3 and its national scale rating (NSR) long-term corporate family rating to Baa3.za from B1.za. 

Eskom debt bailout

Today’s rating action follows the recent signing of the Eskom Debt Relief Act and the receipt of the first payment from the National Treasury in August 2023.

The upgrade of Eskom’s CFR and unguaranteed ratings reflect the passage of the Eskom Debt Relief Act, the rating agency said.

This Act requires the National Treasury to provide R254 billion to Eskom over the period to March 2026 to fund R168 billion of debt maturities and R86 billion of interest payments.

The funds will be structured as a loan in the first instance but will convert quarterly into common equity if the company meets certain conditions during the debt relief period set by the National Treasury. 

Moody’s said it regards these conditions as largely within Eskom’s control.

In addition, R70 billion of Eskom’s debt will be taken over by the National Revenue Fund in 2025-26. The instruments to be transferred have not been specified.

Moody’s said the injection and debt transfer will significantly reduce risks to Eskom’s liquidity over the next three years.

In addition, combined with the prohibition on most new borrowing, it will cause Eskom’s debt to fall from around R450 billion as of March 2023 to around R300 billion by March 2026. 

Moody’s estimates that the majority of the debt reduction will come from unguaranteed debts, with the share of Eskom’s debt benefiting from a government guarantee rising from 74% in March 2022 to almost 80% in March 2026.

“However, the caa1 BCA continues to be constrained by persistently poor operational performance and tariffs that do not adequately finance the company’s operating and capital expenditure,” the rating agency said. 

Eskom’s tariffs under Multi-Year Price Determination 5 (MYPD5), which covers the period from 1 April 2023 to 31 March 2025, have been set based on an Energy Availability Factor (EAF) for the company’s coal plants of around 65%, but actual availability in the first five months of 2023-24 has averaged 56%. 

As a result, usage of diesel-fired gas turbines, which incur significantly higher marginal production costs compared to coal plants, have been running at over 20% of their capacity, significantly above the assumption of 6% used to set Eskom’s tariffs. 

Load-shedding has remained persistent, with the country returning to stage 6 load-shedding from 4 September following the failure of several units.

Non-payment from municipalities

In addition, debt arrears from municipal electricity companies have grown to R63.2 billion as of August 2023, and more than half of the country’s municipalities have defaulted on their bills, Moody’s said.

Eskom has warned that arrears would continue to rise if not effectively addressed. In order to address the “municipal debt spiral”, the National Treasury has introduced a Municipal Debt Relief programme.

Under this programme, Eskom would write off uncollected debts provided municipalities agree to mechanisms that would allow their licences to be revoked for further non-payment and if they commit to installation of pre-paid meters to improve collection, setting cost-reflective municipal tariffs and pursuing non-paying customers. 

However, take-up of the programme has been limited to date, Moody’s said.

“We expect that Eskom will need to raise debt after the end of the debt relief period, particularly to finance investments in networks and to refinance maturing debts,” the rating agency said.

“Without the benefit of a new guarantee scheme, its ability to do so on commercially acceptable terms will rely on significant improvements in its operations, debt collection, governance, and regulatory arrangements.” 

“Absent such improvements or alternative mechanisms to ensure access to capital, the rating is likely to come under pressure as April 2026 approaches.”

ESG risks

Despite significant government support, Eskom’s rating remains significantly lower as a result of ESG risk factors.

These factors include high leverage, weaknesses in internal controls, and affordability concerns – stemming from severe poverty and wealth inequality – that have led to adverse regulatory determinations and an established culture of non-payment by customers. 

The company also faces high carbon transition risk, given its high exposure to coal generation and limited capacity to address this.

The B2-PD probability of default rating, upgraded from Caa2-PD, reflects a revised assumption of a 50% recovery rate. 

The debt relief measures have significantly reduced Eskom’s default risk, and the government continues to have a strong incentive to take further measures in advance of a default because of sizeable backed debts. 

However, the continued deterioration of Eskom’s generation and network assets and the growth of independent power producers mean recoveries are likely to be lower than typical infrastructure issuers if a default were to occur.

The stable outlook reflects Moody’s expectation that the debt relief will provide Eskom with time and financial flexibility to improve operational performance. 

The stable outlook also reflects the stable outlook for the South African government, the agency said.

Ratings outlook

Moody’s said Eskom’s ratings could be upgraded if the company achieves significant improvements in operational performance, debt collection and governance such that it can finance required investments on a sustainable basis. 

The ratings could also be upgraded if the South African government were upgraded.

The ratings could be downgraded if –

• Operational performance or investment needs during the debt relief period prevent the company from reducing leverage as required by the Debt Relief Act, 
• The company fails to comply with other conditions for conversion of the shareholder loans to equity
• There was significant doubt about the company’s ability to raise capital as required after the end of the debt relief period.

Moody’s also upgraded Eskom’s senior unsecured global medium-term notes (GMTN) to B2 from Caa2, its GMTN programme to (P)B2 from (P)Caa2, and its zero coupon Eurobonds to B2 from Caa1.