Photo by: Duane Daws
Ratings agency Fitch has downgraded South African utility Eskom’s long-term local currency issuer default rating (IDR) to 'BBB' from 'BBB+', reflecting the recent downgrade of South Africa's long-term local currency IDR to 'BBB.'
This as the company said it continued to consider the links between Eskom and the South African government of as strong, as evidenced by the Guarantee Framework Agreement (GFA) and, most recently, by the equity conversion of the government's subordinated loan to Eskom.
Fitch's expectation of additional equity contributions in the 2016 financial year also supported the alignment of Eskom's IDR with that of the sovereign.
Fitch, meanwhile, viewed Eskom's standalone creditworthiness as 'B-', reflecting its high leverage, negative free cash flow and weak liquidity position.
While operating profitability has improved, increased debt had resulted in a slight deterioration in both the leverage and coverage metrics for the 2015 financial year.
“Fitch expects Eskom's standalone credit metrics to worsen in 2016. However, [we] forecast the combination of the announced sovereign support and improved trading expectations – largely driven by tariff increases – to result in relatively stable leverage for the year,” it said in a statement on Monday.
Meanwhile, the agency viewed positively the permanent appointment of Brian Molefe as CEO and Anoj Singh as CFO, delivering clarity to the group's executive management and addressing near-term uncertainty over governance and strategic direction.
Commenting on rating sensitivities, Fitch said future developments that could lead to a downgrade included a decline in government support or a downgrade of South Africa's sovereign rating, as well as the failure to achieve more cost-reflective tariffs in the absence of increased government support.