20170721-法国巴黎银行-EM_CREDIT_STRATEGY__Eskom__Credit_fairly_valued,_but_risks_to_emerge_in_the_longer-term_13页_337kb

Eskom Credit Strategy Summary

Core Content

This report from BNP Paribas South Africa provides an analysis of Eskom's credit outlook, focusing on its financial performance, government support, and long-term challenges. The report highlights that while Eskom's current bond yields are fairly valued, the company faces significant long-term risks that may affect its credit profile.

Main Viewpoints

• Current Credit Valuation:
  Eskom's bonds are considered fairly valued at present. Real-money accounts should remain market-weight, especially for investors following the EMBI benchmark. The FY16/17 results showed some positive signs, such as improved margins and reduced leverage, and the company's standalone credit rating is not expected to change in the short term.

• Tariff Increases and Revenue Outlook:
  Revenue increased by 8% year-on-year in FY16/17, driven by a 9.4% tariff hike and improved export sales. However, overall electricity demand remained weak due to economic headwinds. NERSA capped the FY2017/18 tariff increase at 2.2%, far below the previous 8% under MYPD3. This has created a revenue shortfall of ZAR21bn. Eskom has applied for a near-20% increase for FY18/19, but the report is skeptical about its success due to political and social resistance.

• Government Guarantee and Debt Servicing:
  Eskom's financial health is heavily reliant on the government's ZAR350bn guarantee framework. The planned reduction of this guarantee will likely worsen its debt servicing ratios. The company has already drawn down nearly ZAR220bn from this facility. The report warns that issuing non-guaranteed debt could increase financing costs significantly, potentially reducing EBITDA interest coverage.

• Operational and Financial Challenges:
  Eskom continues to face high capital expenditure (CAPEX) relative to cash flow generation, leading to deeply negative free cash flow. Gross debt has increased by 10% to ZAR355bn, with leverage remaining high at 9.5x. Despite some improvement in EBITDA margin (up to 21.2% in FY16/17), the company's financial fundamentals remain fragile.

• Market Access and Funding Needs:
  Eskom has already secured 53% of its FY17/18 funding plan, mostly through development finance institutions. The remaining ZAR39.6bn is expected to be raised via local and international debt markets. The report emphasizes the need for continued market access due to high redemption obligations and upcoming debt repayments.

• Nuclear Energy Uncertainty:
  Eskom's plans for nuclear power remain uncertain. The DoE's 2016 draft IRP proposed delaying nuclear procurement until 2037, and the government's stance is expected to be clarified in the February 2018 budget. The nuclear project could be pursued only at a pace and scale the economy can afford.

• Credit Strategy Recommendation:
  The report recommends that benchmarked investors remain market-weight in Eskom bonds. While long-term risks are significant, the current yield environment and market conditions are supportive. Risks are expected to become more apparent in the FY17/18 results, which will be released in July 2018.

Key Information

• Eskom's Financial Year: 1 April to 31 March.

• Eskom's Revenue and EBITDA:

  • FY16/17 total revenue increased by 8%, EBITDA by 14.4% to ZAR37.5bn.
  • EBITDA margin improved to 21.2%.
  • Net interest coverage dropped to 2.6x, indicating increased financial pressure.

• Debt and Leverage:

  • Gross debt rose to ZAR355bn, up 10% y/y.
  • Net debt increased to ZAR334.875bn.
  • Gross leverage decreased to 9.5x, while net leverage improved slightly to 8.9x.

• Funding Requirements:

  • Eskom expects ZAR71.7bn in annual funding for FY17/18.
  • Around ZAR200bn in debt repayments and ZAR213bn in interest payments are expected over the next five years.

• Market Conditions:

  • EM credit funds have seen strong inflows since 2016, supporting issuance.
  • The report suggests that Eskom may be able to raise significant debt volumes in the primary market, especially through international bonds.

• Rating Implications:

  • Standalone credit rating: b3/ccc+/B-.
  • Government support is crucial for its current Ba2 Neg/B+ Neg/BB+ rating.

• Long-Term Outlook:

  • The report is concerned about Eskom's long-term credit profile, citing insufficient tariff increases, reduced government support, and ongoing operational inefficiencies.
  • The FY17/18 results are expected to highlight these issues, with risks likely to materialize in July 2018.

Conclusion

Eskom's credit profile is currently fairly valued, and the company's recent results show some positive signs. However, long-term challenges remain, including limited tariff increases, a planned reduction in government support, and high leverage. Investors are advised to remain market-weight in Eskom bonds for now, given the supportive market environment, but to monitor developments closely as risks may become more pronounced in the coming years.