NewsSouthern AfricaSouth Africa: 'Less confidence in Eskom's corporate governance' - S&P


Posted on Friday, 20 March 2015 18:16

South Africa: 'Less confidence in Eskom's corporate governance' - S&P

By Crystal Oderson in Cape Town

Photo©ReutersSouth Africa's power utility, Eskom, appears to be lurching from one crisis to another.

The latest headache for the Eskom executives is the downgrading of the utility's bonds to junks status by rating agency Standard & Poor (S&P).

Eskom's long-term ratings were lowered to BB+ from BBB-, the lowest investment grade.

This (downgrading) is very bad news both for the sovereign and the utility

S&P slashed the utility's long-term ratings to non-investment grade and was accompanied by a negative forecast.

This means Eskom, which is already struggling to keep the lights on in one of Africa's largest economies, will continue to find it difficult to raise money on the international market.

"This (downgrading) is very bad news both for the sovereign and the utility," said Nic Boraine, a political analyst.

S&P said the negative outlook reflects 'our opinion that material execution risk remains associated with government's support plan'.

President Jacob Zuma in February promised that the government would inject millions of rand to the cash strapped utility.

The first installment of the cash injection is expected in the next 12 weeks.

However, analysts had predicted the negative rating, as Eskom has been struggling for the past year.

This week the utility was plunged into crisis after the shock announcement that several executives including the chief executive officer, Tsediso Matona had been suspended.

S&P said the suspensions led it to 'question' the corporate governance arrangements at Eskom.

Eskom chairman, Zola Tsotsi has launched an inquiry into the current status of the utility.

Three months have been set aside of the enquiry and S&P said it 'could lead to further deterioration in the company's credit quality'.

"The announcement by the board regarding the suspension of the CEO and three executives has led us to have less confidence in the company's corporate governance arrangements," S&P said.

But Boraine said the suspensions were necessary, an aspect S&P could have overlooked.

"The fundamental problem with how the agencies function is that they ask market participants what they think of one or other phenomenon that is affecting the market rather than examining the phenomenon itself," he said.

"Our call is that 'on balance' the suspensions are positive, giving government's 'war room' strategy elbow room to barge in and start doing some serious digging into the four features of the crisis at Eskom we have mentioned previously".

In a bid to deal with South Africa's crippling energy crisis, Deputy President, Cyril Ramaphosa this week appointed a high profile team led by senior business leaders into a new body known as the Energy Council.

Ramaphosa said the 'war room', which he leads, would advise government on how best to deal with the crisis.

South Africa has been experiencing electricity shortages since October 2014.

In the past few months, 34 percent of Eskom infrastructure has not been functioning.

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