The Federation of Unions of South Africa (FEDUSA) is concerned that global credit rating agency Fitch has placed Eskom on a Rating Watch Negative (RWN) as this may force the cash strapped state power utility to apply for yet another tariff increase or lay-off workers on a large scale to stay afloat. RWN refers to the status that the credit-rating agencies gives Eskom while they are deciding whether to lower that company’s credit rating. Moreover, Eskom has borrowed R355 billion from different institutions. The book value of equity as reported in the financial results for the year ended March 2017 is R175.9 billion. The debt-to-equity ratio is currently 2.0x.
FEDUSA is concerned that the Public Investment Corporation (PIC) bought and holds almost R100 billion worth of Eskom bonds. On average, the coupon payable on the bonds held by the PIC is 7.9% per year.
The negative outlook comes as the country is on a knife edge as deep political uncertainty grows over what rating agencies will say about South Africa when announce the sovereign credit rating on Friday. The agencies have already downgraded South Africa to a sub-investment level or junk status. However speculation is rife that crediting rating agencies will put the announcement of another sovereign downgrading on hold until the outcome of the ANC’s elective conference in December.
“The RWN reflects our intention to reassess the strengths of Eskom’s with the government of South Africa (BB+/Stable) due to Eskom’s weakening liquidity and funding access partially stemming from unresolved governance issues, weak cash flows driven by lower than expected increases due to delays in implementing outstanding regulatory clearing account applications,” Richard Barrow, Fitch’s Principal Analyst said in statement.
Barrow said the key drivers for placing Eskom on a RWN were corporate governance and liquidity issues. It is argued that one in four South Africans or 26% will source their energy from Eskom by 2030, this will reduce the demand for electricity.
“Fitch understands Eskom began a recovery programme to address the findings relating to the qualified audit opinion in the 2017 annual results. The most recent CEO rotations and their increased frequency increases uncertainty about the continuity of the recovery plan. The programme has not yet provided confidence that the targets will be met despite our have been achieved understanding that the milestones set by the committees have been achieved at end – September improving corporate governance,” he said.
“Fitch expects the Minister of Public Enterprises to appoint a permanent Board before the end of November. Eskom has an interim Board on nine members rather than 15. Fitch expects the new Board to appoint permanent management”.