Eskom is looking to wrestle back its investment-grade status as it aims to get out of the shadow of the government, whose generous guarantees have kept the company afloat for more than a decade.
This is as the state-owned entity looks to tap the capital markets again for funding in the next three years, looking to invest billions of rand a year over the next five years in maintaining and expanding its infrastructure.
CFO Calib Cassim said he believed the company, which dominates SA’s energy sector, was on the path to attaining investment-grade status, adding that that was contingent on continued financial discipline and sustaining and building upon the success of the group’s turnaround strategy.
“Progress will not be achieved overnight and will require disciplined execution over the longer term. Our creditworthiness will continue to benefit from the government’s support over the remainder of the debt-relief period,” Cassim said in the group’s annual report.
“However, to achieve financial sustainability and strengthen Eskom’s investment case, we must achieve investment grade status on a stand-alone basis without further support or government guarantees.”
“We expect to walk this path over the next three to five years as industry reforms begin to take shape.”
Moody’s, Fitch and S&P all have Eskom credit ratings at below investment grade — in tandem with that of the sovereign.
However, to achieve financial sustainability and strengthen Eskom’s investment case, we must achieve investment grade status on a stand-alone basis without further support or government guarantees.”
— CFO Calib Cassim
In May, Fitch kept Eskom ratings below investment grade with a stable outlook, while Moody’s changed its outlook to stable from positive. S&P has assigned a positive outlook to Eskom.
The state’s support for Eskom is underscored by a R254bn debt relief programme and a guarantee framework agreement covering most of Eskom’s outstanding debt.
An investment upgrade will go a long way in reducing Eskom’s debt costs, particularly as it looks to capital markets for funding.
“Eskom’s borrowing programme will remain conservative over the next two years, limited to drawdowns from existing facilities. Thereafter, we intend returning to the capital markets to fund expansionary requirements from financial year 2028, targeting up to R25bn per year if required,” Cassim said.
“We plan to source this funding partly through sustainability-linked bonds. To support Eskom’s stand-alone financial sustainability, we aim to reduce the gross debt balance towards a more sustainable level of no more than R300bn, and to improve the gross debt to ebitda ratio to about 3 over the medium term.”
The group — which reported its first profit in eight years this week, underlying the strides it has made in its operational and financial performance — is looking to invest about R320bn or R64bn a year over the next five, to sustain and expand its infrastructure.
It said about 40% of the planned investment was earmarked to support generation capacity and pipeline, with a further 40% allocated towards the transmission development plan and the balance meant to upgrade its remaining distribution network.
“Even though the conditions associated with government’s debt relief remain in effect until financial year 2029, we may access external funding with approval from the minister of finance, provided it is undertaken at a pace that our balance sheet can support,” Cassim said, before adding that the group’s borrowing would remain conservative over the next two years.
“That means being in a position where we can settle our debt obligations on maturity without government support. Therefore, we’ll have to rely primarily on surplus operating cash flows to fund capital expenditure, at least for existing assets, to continue our efforts to deleverage the balance sheet.”
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