ESKOM HOLDINGS SOC LIMITED - Moody's Investor Services Comment

Moody's Investor Services Comment

ESKOM HOLDINGS SOC LIMITED

16 March 2015



MOODY’S INVESTOR SERVICES COMMENT 13 MARCH 2015



Moody’s Investor Services comment- Independent inquiry is credit negative for Eskom

On 12 March 2015, the board of Eskom Holdings SOC Limited (“Eskom”, Ba1 stable), South

Africa’s monopoly power producer, announced that it will commission an independent

inquiry on the current status of the business and its challenges. As a result, four senior

executives of Eskom, including the CEO and Finance Director, will step down for the time

of the enquiry, which could last for up to three months. The inquiry will focus on (1) the

poor performance of generation plants; (2) delays in bringing the new generation plants on

stream;(3) the high costs of primary energy; and (4) the cash flow challenges experienced by

Eskom.

Moody’s notes that the challenges highlighted are not new and are factored into the

company’s standalone credit quality or Baseline Credit Assessment (BCA) of b3. Moody’s has

further commented on these challenges in an Issuer Comment published in January 2015

(see Eskom’s operational performance remains weak but is factored into the rating ).

Whilst Moody’s understands that there are no charges against the executives and no

accusation of wrongdoing, the inquiry is credit negative for Eskom because it may affect

investor sentiment. Investor sentiment is key for the company given the need to access

the debt capital markets to fund a very significant investment programme and refinance

debt maturities. Eskom’s liquidity position, which has been structurally weak, is currently

supported by the proceeds from the issuance in February 2015 of USD1.25 billion notes due

2025.

In accordance with Moody’s rating methodology for government-related issuers (GRIs),

Eskom’s current Ba1 rating continues to be based on the agency’s expectation of high
probability of support from the government of South Africa (Baa2 stable), reflecting the

company's critical role as supplier of substantially all electricity used within the country

(see Moody’s Credit Opinion , November 2014). Moody’s expectation of high support

is evidenced by the direct financial assistance provided in the past, including (1) the

government's R350 billion Guarantee Framework Agreement, (2) a subordinated loan

amounting to R60 billion and, more recently, (3) the package of solutions announced in

September 2014, including an equity injection of R23 billion. The government confirmed

recently that the first R10 billion tranche would be injected by June 2015 and a second R10

billion tranche by year-end 2015.



END

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