A single-notch downgrade by the international rating agencies of Eskom's credit worthiness could add between R3-million and R4-million to the cost of each R1-billion borrowed on the capital markets. But finance director Bongani Nqwababa warned at the weekend that the impact could be even more severely felt with regard to access to both the debt markets, as well as to project-stretched equipment suppliers, which were seeking to reduce their credit exposure.

Asked by National Energy Regulator of South Africa (Nersa) panel member Dr Rod Crompton to quantify the cost of a possible downgrade (see video), Nqwababa said it was impossible to offer precise figures, but that it could add as much as "R4-billion over time" to the cost of its current build programme.

Eskom was planning to spend R343-billion over the next five years on new power stations and on expanding its transmission and distribution systems and felt that it could raise a maximum of R150-billion of that on the domestic and international capital markets.

However, it argued that it would be difficult to reach that level of debt financing if its ratings were downgraded, which, in turn, would place pressure on it to raise additional funding from either its shareholder (ultimately the taxpayer), or Eskom's customers. Alternatively projects could have to be reviewed, until viable funding plans could be found.

All three of the rating agencies that follow Eskom - Standard & Poor's, Moody's and Fitch - had placed Eskom on notice over recent months, asserting that they needed greater certainty on the funding plan be employed in Eskom's build programme.

In fact, Moody's indicated earlier in the week that it could even consider downgrading Eskom by multiple notches unless the funding ambiguity on the mix of sources was resolved.

The agencies were said to be demanding that Eskom sustain an interest cover of three-to-one and a debt-equity ratio of two to one. But Crompton asked what the affect would be on the business and its ratings if those ratios were not be sustained.

Nqwababa said he could only "play with the cards that had been dealt" and stay within the rules, as outlined by the agencies.

"Those are the rules, which are based on their [the rating agencies'] experience of utility companies across the world," he said, adding that their credibility was also geared towards the way it applied its matrices.

Earlier in his presentation, Nqwababa had also warned that it was not only access to capital market that concerned him, but even access to reputable equipment suppliers.

"If people are not confident of your rating, they will seek to front-end load payments to limit their credit exposure," he warned, suggesting that this threat was amplified by the fact that equipment suppliers were stretched to their limits with many build programmes under way throughout the world.

"The global dynamics of a credit crunch, and the fact that there is less appetite for issuing lower-investment-grade debt, means that it is absolutely important that we maintain our strong credit rating," he averred.

To subscribe to Engineering News's print magazine email subscriptions@creamermedia.co.za or buy now.