According to leading ratings agency Moody’s, Eskom’s BA-1 rating continues to reflect its expectation of high Government support. Paul Marty, VP and Senior Analyst at Moody’s chatted to Alec Hogg about the South African electricity utility and the key factors driving the ratings.
The Eskom story, from your perspective, is not a happy one. Perhaps you could just explain the rating – what is the difference (standalone) for Eskom and the fact that the South African Government has actually supported it. I.e. if there were no Government support, what kind of rating might the Eskom paper have right now?
Indeed, we did indicate that Eskom’s stand alone credit quality is weak, which is a reflection of its poor personal performance and the certified national profile, which in turn, reflects insufficient tariffs and the last Capex program, to which you alluded. We indicate in our publication that the standalone credit quality of Eskom would be commensurate with a B3 rating, which is at the lower end of our rating scale.
Just explain that as well, in context. Would that rating be junk?
Yes, indeed, as is the current rating on Eskom, which is BA-1. Nevertheless, it reflects the Government’s support from the South Africans.
You say ‘as is the current rating’. Is that currently junk grade rating?
Yes, we currently have non-existent grade rating on Eskom, which is BA-1, with stable outlook.
That’s a concern, given that Eskom is trying to raise a lot of money and that even the South African Government guarantee is not enough to bring it into investment grade. What does it need to do, to get there?
The debt that we do rate, which is rated BA-1, is not guaranteed by the Government so our BA-1 rating reflects our expectation of support from the Government, but not a direct guarantee, which is why we have a small difference between the rating of the sovereign which is BAA-2 with stable outlook, and the rating of Eskom, which is BA-1, two notches below the rating of the sovereign.
What does Eskom need to do to get its rating back to the levels that it might have been, in bygone years?
The rating of Eskom at the moment, given its very weak level of credit quality, is driven by the sovereign rating. Any improvement in Eskom’s rating would need an improvement in the rating of the sovereign.
So let’s understand this. If Eskom is to be able to borrow money cheaper in the global markets to ensure that it can fulfil its capital requirements; that would only come if the South African Government itself were to improve its rating. The question therefore moves on to the South African Government. What does the South African Government have to do, to get its sovereign rating higher?
You would need to ask my Southern colleagues that question. We have commented on South Africa’s economy and the rating, which is currently BA-2, and that reflects the weak economic growth prospects for the sovereign.
Joining the dots for us there was Paul Marty, who’s the Vice President and Senior Analyst at Moody’s. Junk grade rating for Eskom, despite a Government support. Wow. Who would have thought that 20 years ago, when it was one of the highest rated utilities in the world? In fact, at one point, Eskom was the sixth-best electricity utility on earth. My, how the mighty have fallen.
