S&P's downgrades South Africa's Eskom further into junk territory

JOHANNESBURG (Reuters) - Standard & Poor’s Global Ratings on Friday cut South African power utility Eskom’s credit rating a further notch into subinvestment, raising concerns the country’s sovereign rating would also be dragged into junk status.

An Eskom logo is seen at the entrance of their head offices in Sunninghill, Sandton, February 24, 2016. REUTERS/Siphiwe Sibeko

S&P’s, which has South Africa’s debt on the lowest investment level with a negative outlook, cut Eskom’s long-term corporate credit rating to BB from BB+, two steps below the investment threshold.

Eskom’s 2026 bond weakened on the news, with the yield adding 2.5 basis points by close of trade.

The ratings firm flagged financial pressures faced by Eskom due to the uncertain tariff path resulting from the utility’s ongoing court case against the national energy regulator as a reason for the downgrade.

In August a South African court struck down some of the tariff increases granted to Eskom in 2016.

S&P’s is due to publish its decision on South Africa’s sovereign rating next Friday on Dec. 2.

Some analysts say the move to cut the utility’s rating could be a precursor to a downgrade of the sovereign.

“Seems like a major move ahead of next week. Maybe it increases the chances of a downgrade end next week given the interdependence of parastatal ratings with the sovereign,” said London-based Africa analyst at Nomura Peter Attard Montalto.

Eskom said it was disappointed by the decision by S&P’s, but was confident that its balance sheet put it good stead.

“This one notch ratings downgrade will not have a material impact on Eskom’s funding plans for the financial year ending 31 March 201,” the utility said in a statement.

Eskom, South Africa’s sole power supplier, is keen to build new nuclear stations to generate an additional 9.6 gigawatts of nuclear power, but has faced mounting opposition to the plan, with critics saying that it would be unaffordable at an estimated price of up to 1 trillion rand ($71 billion).

Ratings agency Fitch on Friday affirmed South Africa’s investment-grade credit rating at one notch above ‘junk’ on Friday but changed its outlook to negative from stable, warning that political risks could hurt growth.

($1 = 14.1126 rand)

Reporting by Mfuneko Toyana; Editing by James Macharia