JOHANNESBURG (Reuters) - S&P Global Ratings downgraded the credit rating for South Africa’s state-run power utility Eskom to CCC+ from B- on Wednesday, citing liquidity concerns and insufficient government support that left it at risk of a default.
Cash-strapped Eskom provides virtually all of South Africa’s power and is seen as a risk to the sovereign rating of Africa’s most industrialized economy after years of mismanagement and shoddy governance.
Eskom, which has been facing serious liquidity issues, appointed a new board of directors last month to resolve a leadership crisis. New President Cyril Ramaphosa on Monday appointed former finance minister Pravin Gordhan as public enterprises minister, in charge of state firms such as Eskom.
Gordhan, who has been part of a parliamentary probe into Eskom’s woes, is a popular figure with investors, and there will be high expectations for him to clean up state-owned firms.
S&P’s latest decision on Eskom takes it deeper into junk status, seven notches below investment grade into territory described as a “substantial risk”. The ratings agency also placed Eskom on a “negative” outlook.
“Eskom remains at risk of facing a distressed exchange situation or default in the next six months despite securing 30 billion rand ($2.6 billion) in short-term funding from local and international funders so far this year,” S&P said.
“We now believe there is a lower likelihood that Eskom would receive extraordinary support from the government, reflecting our view that government support for the utility over the past few months has been insufficient given that the utility’s liquidity concerns persist,” it said in a statement.
Eskom said it wanted to provide “enough comfort to investors” and would continue to engage with the rating agencies and other players to implement a turnaround strategy.
Eskom’s interim Group Chief Executive Phakamani Hadebe said the state had provided support to solve its liquidity problems.
Acting Chief Financial Officer Calib Cassim said: “The timing of the downgrade is unfortunate as we believe that we are starting to see slight improvements in market sentiments.”
Eskom also said it had agreed a 20 billion rand credit facility with seven local and international banks.
Eskom’s dollar-denominated Eurobonds fell across the curve after the downgrade, with Eskom’s 2023 eurobond falling 1 cent to 102.9 cents to the dollar according to Tradeweb.
The 2025 issue fell 0.7 cents to 104.5 cents.
Investors in the utility’s bonds were confident the changes in government would help the utility attract funding.
“Eskom will have an easier time than in December to finance itself, to get bridge financing and continue on. This is a more market friendly government than the previous one,” said Kaan Nazli, senior economist at Neuberger Berman, which holds Eskom bonds across the curve.
Local fund manager Futuregrowth, which in 2016 stopped purchasing Eskom bonds over governance concerns said it would “wait-and-see” before deciding to reinvest.
“It’s not for investors to prescribe to Eskom what changes to make. But decisions do need to be made by the board to put Eskom back on to sound operational footing,” Futuregrowth’s Olga Constantatos said.
Additional reporting by Mfuneko Toyana in Johannesburg and Karin Strohecker in London; Editing by James Macharia and Edmund Blair