S&P Global lifts Exxaro’s rating despite lingering headwinds from Eskom

RATINGS agency S&P Global has raised its South Africa national scale ratings on JSE-listed Exxaro Resources to “zaA/zaA-1” from “zaA-/zaA-2”, saying it had built a track record of stable operational and financial performance despite headwinds from Eskom.

S&P said in a note that it believed the lingering risks of payment delays and non-payment at Eskom, Exxaro’s biggest customer, had stabilised for now.

The agency said Eskom represented 60 percent of the company’s revenue and this made Exxaro vulnerable to payment delays or non-payments from Eskom due to the power utility's liquidity challenges.

“While we continue to see this as Exxaro’s largest risk, we recognise that the coal miner has delivered a stable performance over the past three years and has benefited from reliable and timely payments from Eskom, underscoring its importance to Eskom and to South Africa's energy supply,” said S&P Global.

During the year ended in December, Exxaro’s revenue increased 12 percent to R28.92 billion from R25.72bn a year earlier mainly due to higher commercial coal revenue and record coal export volumes.

S&P said Exxaro’s relationship with Eskom last year was tested when the power utility declared a force majeure event on its contractual obligations, following reduced energy demand due to the pandemic-related lockdown.

“However, we understand that Exxaro did not experience payment delays nor a reduction in off-take below contractual minimums in 2020,” said S&P Global.

Last April, Eskom issued a force majeure notice to all its coal suppliers after demand for electricity dropped by more than 7 500MW when harsh curbs were implemented due to the Covid-19 pandemic outbreak.

Exxaro said in its annual results for the year ended in December that the force majeure resulted in Eskom not paying R95 million for the months of April and May last year.

S&P said Exxaro had recently refinanced its syndicated bank debt facility, extending maturities by five years and strengthening its liquidity position.

“Exxaro’s liquidity position and ability to manage high-impact events have strengthened following the April 2021refinancing of its syndicated bank facilities,” said S&P Global.

Exxaro extended maturities on its South African R2.5bn bullet loan, R2.25bn amortised loan, and R3.25bn to 2026.

S&P said the rating on Exxaro reflected its track record in delivering solid operational and financial performances, despite its concentration to Eskom.

The ratings agency said it expected Exxaro to maintain adequate liquidity with debt to earnings before interest taxation, depreciation and amortisation of 1.3x-1.7x and funds from operations to debt close to 50 percent.

S&P Global said that it could lower the rating if Exxaro’s liquidity position were to weaken.

“This could result from Exxaro experiencing payment delays or non-payment on sales to Eskom, lower-than-expected export market prices and volumes or a large debt-funded acquisition. We see limited rating upside given Exxaro’s concentration to Eskom, which remains in a weak liquidity position,” said S&P.