S&P downgrades Exxaro, debt

S&P said it lowered its long- and short-term South Africa national scale ratings on Exxaro Resources Ltd. to zaBB+/zaB from zaBBB+/zaA-2 and the South Africa national scale rating on its senior unsecured debt to zaBB+ from zaBBB+.

S&P said the downgrade reflects its view of the weakening creditworthiness of its key offtaker, electricity utility Eskom Holdings SOC Ltd.

On Dec. 8, the agency lowered its long-term corporate credit rating on Eskom to BB- from BB and its long- and short-term South Africa national scale ratings to zaBB+/zaB from zaBBB/zaA-2. The downgrade of Eskom follows the lowering of the local currency long-term sovereign rating on South Africa to BBB from BBB+ and incorporates the decreasing predictability of full and timely government support for Eskom in all circumstances.

“There is also added financial pressure on Eskom due to uncertainty around short-term electricity regulated tariff determination and the extension of the use of the government guarantee that expires in March 2017. The guarantee is important for Eskom to obtain additional funding for any shortfall arising from insufficient tariff levels,” S&P said in a news release.

Exxaro is highly exposed to Eskom through contractual long-term offtake agreements with the electricity utility, the agency added. About 80% of Exxaro's coal production is supplied to Eskom under commercial contracts and captive power station tied-contracts.

Notwithstanding Exxaro's fair business profile and favorable leverage metrics, S&P said it considers that financial constraints at Eskom may hamper Exxaro's cash flows.

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