Extra Bailout Won't End Eskom's Challenges, Moody's Says

(Bloomberg) -- The extra 59 billion rand ($4.1 billion) of financial support South Africa is providing cash-strapped power utility Eskom Holdings SOC Ltd. is credit-positive for the company, but its debt outlook will depend on whether it can curb cost growth, Moody’s Investors Service said.

“We currently expect Eskom’s debt to broadly stabilize as a result of the government capital transfers in financial years 2020-21,” Moody’s analysts including Joanna Fic said in a statement on its website Friday. “However, the company’s future debt trajectory will depend on its ability to contain operating costs, which are likely to remain under upwards pressure, and capital spending.”

The electricity company, which is seen as the biggest threat to the nation’s economy, will get 26 billion rand of the money this financial year and 33 billion in 2020-21. That’s only five months after Finance Minister Tito Mboweni announced a three-year 69 billion-rand cash injection for the utility.

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Eskom is struggling under more than 440 billion rand of debt and expects to report another annual loss this month because of cost overruns on new plants and unreliable generation from aging coal facilities that resulted in power outages in the first quarter. The government has vowed to help the company that provides about 95% of the nation’s power as the dire state of its finances have became clearer.

The longer-term evolution and sustainability to Eskom’s capital structure will depend on a strategic turnaround plan that’s yet to be devised, said Moody’s, which is the only major credit-rating company that still assesses South Africa’s debt as investment grade. It called the extra bailout without an accompanying plan to make the utility more sustainable credit-negative for the nation.

Earlier, Fitch Ratings Ltd. cut the outlook on its assessment of South Africa’s debt to negative, with the nation risking a drop deeper into sub-investment territory. It cited the additional support for Eskom as the reason for the move.

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