Fitch drops outlook on Eskom to negative

Cape Town - Fitch Ratings on Thursday revised the outlook on Eskom to negative from stable, while affirming its long-term local-currency issuer default rating (IDR) at 'BBB-'. 

The revision of Eskom’s outlook reflects the change in outlook on South Africa’s long-term IDR to negative from stable as announced by Fitch last month.

However, it added that uncertainty around the approval for the Guarantee Framework Agreement (GFA) contributed to the negative outlook on the IDR and national long-term ratings.

“Eskom welcomes Fitch’s decision to affirm our credit rating at ‘BBB-‘. We view Fitch’s and Moody’s rating affirmations as an indication of the positive financial and operational results achieved by the business," said Anoj Singh, chief financial officer.

"The GFA is due to expire in March 2017 and in the event this agreement is not renewed, the share of guaranteed debt would likely be lower and we may notch down Eskom's rating from the sovereign leading to a one-notch downgrade," said Fitch.

At the end of Eskom's financial year, R226bn of GFA was used for drawn debt and undrawn committed facilities, including a R45bn domestic medium term note programme, Fitch said.  

"The remaining currently unused guarantee package of R124bn is essential to support the borrowing plan of R327bn over 2017-2021."

The ratings agency noted that total guaranteed debt reduced to 32% of total outstanding debt at the end of Eskom's financial year, compared to 49% in the previous year, reflecting Eskom's ability to raise unguaranteed debt.

"However, if the GFA extension is not granted, this would introduce uncertainty to the borrowing plan in our view and Eskom could face a funding crisis considering its capex plans."

"We are acutely aware of the concerns raised by the rating agency and continue to engage with the relevant stakeholders to expediently resolve these issues”, said Singh.

Moody's Investors Service confirmed Eskom's rating after placing it on review for a downgrade, while S&P Global Ratings lowered Eskom’s long-term corporate credit rating to 'BB' from 'BB+', citing financial risks.

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