Research Update:

Utility Eskom Downgraded To 'CCC+'

On Ongoing Liquidity Concerns And
Insufficient Government Support;
Outlook Negative
Primary Credit Analyst:
Omega Collocott, Johannesburg +27 11 214 4854; omega.collocott@spglobal.com

Secondary Contact:
Matan Benjamin, London +44 207 176 0106; matan.benjamin@spglobal.com

Table Of Contents
Overview
Rating Action
Rationale
Outlook
Related Criteria And Research
Ratings List
Regulatory Disclosures
Glossary

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Research Update:

Utility Eskom Downgraded To 'CCC+' On Ongoing

Liquidity Concerns And Insufficient Government
Support; Outlook Negative
Overview
• Eskom remains at risk of facing a distressed exchange situation or default in the
next six months despite securing South African rand (ZAR) 30 billion in short-term
funding from local and international funders so far this year.
• We now believe there is a lower likelihood that Eskom would receive extraordinary
support from the government, reflecting our view that government support for the
utility over the past few months has been insufficient given that the utility's
liquidity concerns persist.
• We are therefore downgrading Eskom to 'CCC+' and 'zaB' from 'B-' and 'zaBB-'.
• The negative outlook points to uncertainty regarding the extent and timeliness of
government support for Eskom over the coming six months, considering the magnitude
of the utility's funding deficit and refinancing risks.

Rating Action
On Feb. 27, 2018, S&P Global Ratings lowered its long-term foreign and local
currency issuer credit ratings on South Africa-owned utility ESKOM Holdings SOC Ltd.
to 'CCC+' from 'B-'. The outlook is negative.

At the same time, we lowered our long-term South Africa national scale rating on
Eskom to 'zaB' from 'zaBB-', and affirmed our 'zaB' short-term national scale
rating.

Rationale
The downgrade reflects our view that the possibility of a distressed exchange or
default in the next six months continues to hang over Eskom despite the utility
having secured South African rand (ZAR) 30 billion (around $2.5 billion) in short-
term funding commitments from local and international funders over January-February
of this year. The rating action also incorporates our view that the support provided
by the government to Eskom over the past few months has been insufficient. This has
led us to reassess the likelihood of extraordinary government support for Eskom to
high from very high.

We note that Eskom has so far this year secured an additional gross ZAR30 billion in
short-term funding, of which only ZAR20 billion will be available beyond March 1,
2018. These recently concluded facilities are in the form of short-term bridging
finance.

Despite the near-term improvement in cash balances, Eskom has monthly debt service
of ZAR2 billion-ZAR6 billion over the six months ending Aug. 31, 2018, excluding

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 Research Update: Utility Eskom Downgraded To 'CCC+' On Ongoing Liquidity Concerns And Insufficient
Government Support; Outlook Negative

refinancing of its short-term bridge funding and recurring negative free cash flow.
Furthermore, the 5.2% sub-inflation tariff increase awarded by the regulator (NERSA)
in fiscal year 2019 (ending March 31, 2019), against a budgeted 10.5% increase, is
likely to exacerbate negative cash flow generation and weigh on already low investor
sentiment. We therefore anticipate pronounced pressure on Eskom's fiscal 2019
financing plans, which include capital expenditures (capex) of around ZAR55 billion
and negative free cash flow, as well as refinancing ZAR20 billion in bridge
financing due Aug. 31, 2018, and about ZAR20 billion in scheduled debt maturities.
Consequently, Eskom remains at risk of facing a distressed exchange situation or
default in the next six months.

We acknowledge that Eskom is addressing its structural and liquidity challenges,

including reducing its fiscal 2018 funding requirements by ZAR14 billion to ZAR54
billion, with the debt issuance reduction compensated by lower capex and operational
cash outflows. However, given that the company has already rationalized its capital
and operating expenditures significantly, we see limited additional scope for cost
cuts in fiscal 2019.

Furthermore, the qualified opinion issued to ESKOM on its fiscal 2017 financial
statements triggered a covenant in its ZAR15 billion facility from the Development
Bank of Southern Africa (DBSA). While the DBSA has provided a contingent waiver
(predicated on actions to be taken to ensure Eskom receives an unqualified audit
opinion for its fiscal 2018 financial statements), if the fiscal 2018 financial
statements are qualified, a covenant waiver breach could occur on or before June 30,
2018. Moreover, despite the bridging finance recently committed by local and
international market participants, we think market sentiment of international and
domestic investors is weak, implying that Eskom's ability to attract senior
unsecured debt funding in line with its requirements presents a significant
challenge. These factors underpin our 'ccc-' assessment of Eskom's stand-alone
credit profile (SACP).

Although the South African government has taken measures to help Eskom, we think
that government support to the utility over the past few months has been
insufficient. Nevertheless, of the government's actions to support Eskom, we note:

• The appointment of a new board, replacing the executives who had been allegedly
implicated in impropriety, and undertaking to appoint permanent executives in key
positions by March 2018; and
• Provision of explicit assistance in securing short-term bridging funding
commitments of ZAR30 billion from market participants (including a guarantee).

We recognize that the government's support in obtaining the aforementioned bridge

funding commitments played a key role in enabling the publication of Eskom's
(reviewed, unqualified) interim financial statements on Jan. 30, 2018, ahead of the
Johannesburg Securities Exchange (JSE) deadline of Jan. 31, 2018. Had this funding
not been secured, Eskom's reviewed interim financial statements for the six months
ended Sep. 30, 2017, would most likely have contained a going-concern qualification.
Also, in the event that the publication of the financial statements had been delayed
beyond Jan. 31, 2018, the JSE would have had the right to suspend trading in Eskom's
domestic bonds.

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 Research Update: Utility Eskom Downgraded To 'CCC+' On Ongoing Liquidity Concerns And Insufficient
Government Support; Outlook Negative

Still, in our view, the government support made available in recent months provided
insufficient evidence of the government's ability and willingness to address severe
and imminent liquidity stresses in a timely or sustainable manner. Despite recent
events indicating that the government would adopt a more constructive attitude
toward supporting its state-owned enterprises, including statements by the President
in his State of the Nation address, the support framework set forth in the budget
speech on Feb. 21, 2018, fell short of our expectations. In our view, the budget
does not adequately address the amount and timing of financial support given Eskom's
imminent forthcoming liquidity requirements, and focused instead on previously-
announced planned strategic asset sale initiatives, extensions to the guarantee
framework, and changes to management structure.

Furthermore, current levels of government support follow diminished issuances in the

local bond and commercial paper markets after negative news concerning financial
impropriety in South African state-owned enterprises came to light in the State of
Capture report in October 2016, which was followed by resignations and suspensions
of members of Eskom's senior executive team. Despite these circumstances, during
2017 the government and national treasury did not provide meaningful additional
support beyond planned issuances under the government-guarantee framework (GSF).
While Eskom's total utilization of GSF guarantees appears to be broadly on track, we
note that only ZAR72 billion of the ZAR350 billion remains unutilized, of which
ZAR59 billion is currently under negotiation.

We believe that, cumulatively, the government has provided an insufficient response

to both the closure of local bond markets to Eskom in 2017, and, more recently, the
utility's acute liquidity challenges so far this year. Although we still believe
that Eskom will benefit from considerable government support, the circumstances
under which such support will be forthcoming have become less predictable, as has
the amount, nature, and timeliness.

Our 'ccc-' assessment of Eskom's SACP is based on our view of the utility's weak
liquidity, taking into account continuing and sizable negative free cash flow,
combined with the company's unsustainable capital structure (without government
support).

Liquidity
Our assessment of Eskom's liquidity as weak reflects the pressure Eskom faces, since
its revenues are insufficient to compensate for higher costs, significant capex
commitments, and the difficult operating environment which has constrained growth in
electricity demand. In addition, we think the company has a relatively high
dependence on what we consider to be uncommitted sources of funding. For example, as
of Jan. 30, 2018, the company was still negotiating approximately 46% of its ZAR55
billion of funding requirements for fiscal year ending March 31, 2018. We forecast
that Eskom's liquidity sources will cover its uses by materially less than 1.0x over
the 12 months started Dec. 31, 2017.

In addition, we consider that prospects for liquidity improvements continue to be

slim given the current depressed local issuance activity, and recent approval by the

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 Research Update: Utility Eskom Downgraded To 'CCC+' On Ongoing Liquidity Concerns And Insufficient
Government Support; Outlook Negative

regulator of sub-inflation tariff increases, which exacerbate the level of negative

cashflow generation.

We calculate that Eskom had the following liquidity sources as of Dec. 31, 2018, and
over the subsequent 12 months, assuming that the ZAR30 billion committed bridge
funding is raised and repaid (ie, not refinanced) within the coming 12 months:

• Cash and marketable securities of about ZAR4.4 billion at the company level;
• Revolving credit lines of about ZAR3.2 billion; and
• Cash funds from operations of ZAR8 billion-ZAR9 billion.

We calculate the following liquidity uses for the same period:

• Capex of about ZAR45 billion-ZAR55 billion in the next 12 months; and

• Principal debt maturities of ZAR18 billion-ZAR20 billion.

Outlook
The negative outlook on Eskom reflects uncertainty regarding the government's
commitment and ability to provide timely support to cover any of the company's
funding shortfalls over the coming six months, and the risk of further deterioration
of the company's SACP.

Downside Scenario
We could lower our long-term rating on Eskom by one or more notches if we consider
that the likelihood of extraordinary government support has weakened further. We may
conclude that the likelihood of government support has reduced if we see further
weakness in the predictability and level of such support. This may be indicated by a
further deterioration of Eskom's financial position without offsetting measures
taken by the government. Such a scenario could occur, for example, if we were to
consider default or distressed exchange conditions were to become inevitable over a
less than three months horizon while the government was not providing any additional
support to the entity.

We could also lower the long-term rating by one notch if we downgrade the sovereign,
all other factors remaining unchanged.

Upside Scenario
We would consider revising the outlook to stable if pressure on Eskom's liquidity
eased sustainably, and the government provides additional funding to offset the
company's large negative free cash flow.

Related Criteria And Research

Related Criteria
• Criteria - Corporates - General: Reflecting Subordination Risk In Corporate Issue
Ratings - September 21, 2017
• General Criteria: S&P Global Ratings' National And Regional Scale Mapping Tables -

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 Research Update: Utility Eskom Downgraded To 'CCC+' On Ongoing Liquidity Concerns And Insufficient
Government Support; Outlook Negative

August 14, 2017

• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings - April
07, 2017
• General Criteria: Rating Government-Related Entities: Methodology And Assumptions
- March 25, 2015
• Criteria - Corporates - General: Methodology And Assumptions: Liquidity
Descriptors For Global Corporate Issuers - December 16, 2014
• Criteria - Corporates - Utilities: Key Credit Factors For The Regulated Utilities
Industry - November 19, 2013
• Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments -
November 19, 2013
• General Criteria: Methodology: Industry Risk - November 19, 2013
• Criteria - Corporates - General: Corporate Methodology - November 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions - November
19, 2013
• General Criteria: Group Rating Methodology - November 19, 2013
• General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings:
Methodology And Assumptions - November 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For
Corporate Entities And Insurers - November 13, 2012
• General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings -
October 01, 2012
• General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating - October
01, 2010
• General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009

Related Research
• Research Update: South African Utility ESKOM Downgraded To 'B-' On Weaker
Liquidity And Reduced Likelihood Of Support; Outlook Negative, Nov. 28, 2017

Ratings List
Rating

To From

ESKOM Holdings SOC Ltd.

Corporate Credit Rating

Foreign and Local Currency CCC+/Negative/-- B-/Negative/--

South Africa National Scale zaB/--/zaB zaBB-/--/zaB

Senior Secured

Local Currency CCC+ B-

Senior Unsecured

Foreign Currency CCC+ B-

Local Currency CCC+ B-

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 Research Update: Utility Eskom Downgraded To 'CCC+' On Ongoing Liquidity Concerns And Insufficient
Government Support; Outlook Negative

Regulatory Disclosures
• Primary Credit Analyst: Omega Collocott, Director
• Rating Committee Chairperson: Matan Benjamin
• Date initial rating assigned: Nov. 21, 1995
• Date of previous review: Nov. 28, 2017

Disclaimers
This rating has been determined by a rating committee based solely on the
committee's independent evaluation of the credit risks and merits of the issuer or
issue being rated in accordance with S&P Global Ratings published criteria and no
part of this rating was influenced by any other business activities of S&P Global
Ratings.

This credit rating is solicited. The rated entity did participate in the credit
rating process. S&P Global Ratings did have access to the accounts, financial
records and other relevant internal, non-public documents of the rated entity or a
related third party. S&P Global Ratings has used information from sources believed
to be reliable but does not guarantee the accuracy, adequacy, or completeness of any
information used.

Glossary
• Anchor: The starting point for assigning an issuer a long-term rating, based on
its business risk profile assessment and its financial risk profile assessment.
• Acceleration event: The means the right--as set out in the documentation--by which
bank lenders or bondholders could demand early prepayment of loans or bonds,
respectively.
• Business risk profile: This measure comprises the risk and return potential for a
company in the market in which it participates (its industry risk), the country
risks within those markets, the competitive climate, the company's competitive
advantages and disadvantages (its competitive position).
• Capital: The sum of equity and debt.
• Competitive advantage: The strategic positioning and attractiveness to customers
of the company's products or services, and the fragility or sustainability of its
business model.
• Competitive position: Our assessment of a company's: competitive advantage;
operating efficiency; scale, scope, and diversity; and profitability.
• Country risk: This measures a country's influence on the overall credit risks for
a rated company with regards to a country's economic, institutional and governance
effectiveness, financial system, and payment culture/rule of law risks.
• CreditWatch: This highlights the potential direction of a short- or long-term
rating over the short term, typically less than three months. Ratings may be
placed on CreditWatch where, in our view, an event or a deviation from an expected
trend has occurred or is expected and additional information is necessary to
determine the rating impact.
• Creditworthiness: Ability and willingness of a company to meet its debt and debt-
like obligations; measured by assessing the level current and future resources
relative to the size and timing of its commitments.
• Earnings: Proxy for profit or surplus yielded by an entity after production and
overhead costs have been accounted for in a given period.

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Government Support; Outlook Negative

• EBITDA margin: This is EBITDA as a fraction of revenues.

• EBITDA: This is earnings before interest, tax, depreciation, and amortization.
• Economies of scale: This is the cost advantage that arises with increased size or
output of a product.
• Efficiency gains: Cost improvements.
• Financial headroom: Measure of deviation tolerated in financial metrics without
moving outside or above a predesignated band or limit typically found in loan
covenants (as in a debt-to-EBITDA multiple that places a constraint on leverage)
or set for the respective rating level. Significant headroom would allow for
larger deviations.
• Financial risk profile: This measure comprises our assessment of a company's cash
flow/leverage analysis. It also takes into account the relationship of the cash
flows the organization can achieve given its business risk profile. The measure is
before assessing other financial drivers such as capital structure, financial
policy, or liquidity.
• Free operating cash flow: Cash flow from operations minus capital expenditure.
• Funds from operations: EBITDA minus interest expense minus current tax.
• Government-related entity: An entity that could, under stress, benefit from
extraordinary government support in order to meet its financial obligations; or
conversely an entity controlled by a government that could be subject to negative
extraordinary government intervention if the government is under stress.
• Group rating methodology: The assessment of the likelihood of extraordinary group
support (or conversely, negative group intervention) that is factored into the
rating on an entity that is a member of a group.
• Industry risk: This addresses the major factors that affect the risks that
companies face in their respective industries.
• Issue credit rating: This is a forward-looking opinion about the creditworthiness
of an obligor with respect to a specific class of financial obligations or a
specific financial program.
• Issuer credit rating: This is a forward-looking opinion of an obligor's overall
creditworthiness.
• Leverage: The level of a company's debt in relation to its earnings before
interest, tax, depreciation, and amortization.
• Liquidity: This is the assessment of a company's monetary flows, assessed over a
12 to 24 month period. It also assesses the risk and potential consequences of a
company's breach of covenant test, typically tied to declines in EBITDA.
• Management and governance: This addresses how management's strategic competence,
organizational effectiveness, risk management, and governance practices shape the
issuer's competitiveness in the marketplace, the strength of its financial risk
management, and the robustness of its governance.
• Operating efficiency: The quality and flexibility of the company's asset base and
its cost management and structure.
• Outlook: This is the assessment of the potential direction of a long-term issuer
rating over the short to intermediate term (typically six months to two years).
• Profitability ratio: Commonly measured using return on capital and EBITDA margins,
but can be measured using sector-specific ratios.
• Stand-alone credit profile (SACP): S&P Global Ratings' opinion of an issue's or
issuer's creditworthiness, in the absence of extraordinary intervention or support
from its parent, affiliate, or related government or from a third-party entity
such as an insurer.

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 Research Update: Utility Eskom Downgraded To 'CCC+' On Ongoing Liquidity Concerns And Insufficient
Government Support; Outlook Negative

Certain terms used in this report, particularly certain adjectives used to express
our view on rating relevant factors, have specific meanings ascribed to them in our
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