S&P mulls an upgrade for Eskom based on new debt relief plan
Credit ratings agency S&P Global will keep a close watch on how the new debt relief plan for Eskom, announced by the Treasury in February, helps in strengthening the power utility’s liquidity over time, as it mulls upgrading its CCC+ rating.
The agency said on Wednesday it expected the R254bn debt relief agreement to be implemented over the next three years, to address Eskom’s nearterm debt obligations and give the state-owned power utility room to focus on operational improvements and electricity sector reform targets.
It warned the ratings could be put under downward pressure if there is a delay in the implementation of the debt relief agreement beyond mid-2023, or if there is further unforeseen deterioration in Eskom’s operating performance.
“We expect the agreement to improve Eskom’s liquidity and capital structure, and put the company on a path to financial sustainability, notwithstanding severe operational challenges that remain. We therefore placed our ratings on Eskom on CreditWatch with positive implications,” S&P Global said.
The agency now has Eskom on a “CCC+” issuer credit rating implying the utility was vulnerable to adverse economic conditions and would only be able to meet is financial commitments if conditions remained favourable.
The CreditWatch indicates the agency might raise the rating by one or more notches should the debt relief agreement help to improve Eskom’s liquidity over time and reduce the risks of a near-term default event.
It forecast that Eskom’s gross debt could narrow to about R255bn by the end of fiscal 2026 from where it stands now at about R420bn.
This would depend on Eskom meeting the conditions set by the Treasury that would see the loans replaced with equity issuances.
If conditions are not met, the Treasury loans will attract interest at the market rate.
S&P said that despite the debt plan Eskom’s finances would remain sensitive to further deterioration in electricity generation volumes and management of its capital expenditure cycle.
It said that deteriorating electricity volume production coupled with weak economic growth conditions in SA would mean that Eskom would struggle to not meet anticipated revenue levels as approved by the energy regulator which awarded Eskom tariff increases of 18.5% in 2023 and 12.5% in 2024.
“With [load-shedding] expected to last for at least the next 24 months, we think lower electricity volumes supplied, high usage of expensive dieselpowered open cycle gas turbines and large working capital outflows due to nonpayment by municipalities, will remain key risks to cash flows,” the ratings agency said.
Debt owed to Eskom by municipalities has doubled over the past four years from about R25bn to more than R50bn.
“We expect to resolve the CreditWatch in the coming quarters once the Eskom Debt Relief Bill has been signed and we obtain documentation on the terms and conditions of the agreement between the Treasury and Eskom. For an upgrade, we would also need to observe a track record of subordinated loans from the government being replaced with equity issued by Eskom.”