Jacob Maroga,
CE, Eskom
12 August 2008 – Eskom’s foreign and local credit rating has been downgraded by Moody’s to Baa2, making it more expensive to raise capital for the utilities capital expansion plan.

Eskom needs to raise US$20 billion of a required US$45.73 billion from borrowings and loans.  However, the downgrading by Moody’s may be a setback for the utility.

Moody’s have downgraded Eskom’s local currency rating from A1 to Baa2 and its foreign currency rating from A2 to Baa2. Eskom’s baseline credit assessment has also been lowered from eight to 13. The assessments are on a scale of one to 21, with one being "good".

Despite a government announcement that it will loan US$8 billion to Eskom over the next three years, and a tariff increase, Moody’s believes "that there is still an element of uncertainty as to the likely future behaviour of government towards its wholly owned subsidiary."

"Moody’s expects Eskom’s external borrowings to rise substantially over the next five years. Credit metrics are expected to be very weak … with financial ratios that … would position Eskom in the speculative grade rating category for a utility with a high business-risk profile," said Craig Jamieson, Moody’s lead Eskom analyst.

Eskom’s rating outlook was negative said Moody’s, attributing this to the utility’s "weak" baseline credit assessment and the risk associated with its expansion programme "and the political and regulatory pressures that surround it".

Eskom CE Jacob Maroga has expressed disappointed with the downgrade. " Progress has been made on all critical fronts, including shareholder support and a tariff path that places Eskom on course to achieve long-term financial sustainability."

With Eskom’s existing financial assets, the US$20 billion loan and expected tariff increases, Eskom’s liquidity needs were adequately addressed Maroga said.

"Moody’s will need to see irrefutably supportive behaviour from the government before it can consider upwardly revising its assessment of support," the agency said, citing governments actions of previous years  "where Eskom appeared to lack strategic direction and financial support from government".

"One of the reasons behind the downgrade is that the government has under- resourced Eskom for a long time," says Nedbank chief economist Dennis Dykes.

Treasury director general, Lesetja Kganyago has indicated treasury might guarantee Eskom’s existing debt after the downgrade.

"To ensure that Eskom has access to capital markets, we will guarantee Eskom’s new issuance. If there is a need to guarantee current issuance, we will do so as well. We are disappointed, but we don’t think it’s a train smash," Kganyago said.