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Jun 06, 2008

Explicit State support needed to secure Eskom rating if tariff hike is refused - Fitch

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Credit-ratings agency FitchRatings, which has State-owned power utility Eskom on an "negative outlook", would probably move to downgrade the utility immediately if it failed to secure a 60% tariff increase from the regulator later this month, unless the announcement was associated with a clear signal form government that there would be further support beyond the R60-billion already promised.

However, FitchRatings director: corporates Alistair Crosbie did not concur with suggestions that a downgrade would limit the utility's access to international capital markets, given its position as a State-owned entity as well as its market dominance.

He agreed, though, that the pricing of any future debt raised by Eskom would be made more expensive should it be downgraded by Fitch and others.

"Eskom is going to remain the dominant electricity provider in South Africa, wholly-owned by the government, for the immediate term at least.

"That alone will carry them . . . so we expect that lenders will not be scared away by a downgrade," Crosbie explained.

Speaking at a media briefing in Johannesburg, Crosbie indicated that the tariff determination by the National Energy Regulator of South Africa (Nersa) would be the main trigger for any downgrade.

Nersa, which had been in touch with FitchRatings and the other agencies on their requirements, was currently in a process of deliberating on Eskom's request for a 60% upward revision to its tariff for 2008/9, from the 14,2% already sanctioned for the year. It would make its decision known on June 18.

"If they [Eskom] don't get the increase, we would immediately look to see whether government would be allocating more than the R60-billion, which they had indicated they would be allocating.

"We would expect to see a signal of some additional support from government and if that is not forthcoming, that would probably trigger a downgrade by a single notch, to AA+," Crosbie said in response to a question posed by Engineering News Online.

He stressed that it, and other ratings agencies, could only work with the facts at their disposal and that, in the absence of an explicit guarantee from Eskom's shareholder, the South African government, it had to base Eskom's rating on its financial ratios, which were likely to weaken considerably as the gap between its revenue and its expenditure grew.

Even if the R60-billion term sheet from National Treasury was more front-end loaded than the current proposal, which would see most of the money flow in the last couple of years of a five-year transfer window, it also might not be sufficient, in Crosbie's view, to prevent a downgrade.

"I think the other ratings agencies are pretty much on the same wavelength," he added.

In fact, international ratings agencies Moody's and Standard & Poor's have both indicated that they might cut Eskom's credit rating by at least a notch, unless there was greater certainty on the future funding sources for the group's R343-billion capital programme.

But FitchRatings director Veronica Kalema, who was in South Africa this week from London as part of a review of South Africa's sovereign rating, said she did not believe that any downgrade of Eskom would necessarily have a knock-on effect to South Africa's sovereign rating, as some have suggested.

South Africa, despite its current internal and external shocks, appeared fundamentally sound, with its debt ratios "still good". But she noted that the power crisis, together with surging inflation, was emerging as a key risk factor.

Kalema, who heads the group's Middle East and Africa sovereign-ratings team, said a review of South Africa's rating should be published within four to six weeks.


Edited by: Terence Creamer
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