March 19, 2015 / 4:28 PM / 5 years ago

UPDATE 3-S&P downgrades South Africa power utility Eskom to junk

* Eskom faces funding crunch

* Executives suspended to make way for inquiry

* Ratings agency says upgrade “unlikely” (Adds application for more power price increases)

By Ed Stoddard

JOHANNESBURG, March 19 (Reuters) - Standard & Poor’s (S&P) on Thursday cut its credit ratings for South Africa’s Eskom to junk, which will almost certainly raise borrowing costs for the cash-strapped firm that generates most of the power in Africa’s most advanced economy.

The South African rand extended losses against the U.S. dollar to 2 percent, underscoring investor jitters about any negative news around Eskom.

“This now puts Eskom in a different category for some funds, who can’t hold sub-investment grade assets. It creates some more difficulties and increases funding costs,” said Peter Attard Montalto, emerging markets economist at Nomura.

The ratings agency, which also kept its negative outlook for Eskom, said in a statement that last week’s shock suspension of the utility’s CEO and three other senior executives “has led us to have less confidence in the company’s corporate governance arrangements as well as in its stand-alone credit profile.”

“Consequently, we are lowering our long-term ratings on Eskom to ‘BB+’ from ‘BBB-‘ and national scale ratings to ‘zaA/zaA-2’ from ‘zaAA-/zaA-1,” it said.

S&P said the negative outlook reflected “our opinion that material execution risk remains associated with the government’s support plan.”

The government has said it aimed to sell “non-core” assets to raise 23 billion rand ($2 billion) for Eskom this year, which faces a funding gap to 2018 of up to 200 billion rand as it struggles to keep the lights on and build new power plants.

The utility said its CEO and the other executives were suspended last week while an inquiry is held into the operations of the troubled utility.

S&P said Eskom’s “operating performance has not yet stabilized due to rising costs and the very tight generation capacity margin in South Africa.”

The agency also cited Eskom’s delays in implementing tariffs that covered its costs and the rising debt associated with its capital expenditures.

A deterioration of the utility’s stand-alone credit profile “could result if we consider that, over the next 12 months, Eskom may be about to experience a near-term liquidity crisis, violation of financial covenants, or is likely to consider a distressed exchange offer or redemption” it said.

S&P said it considered an “upgrade unlikely in the foreseeable future.”

Separately, Eskom has applied for an additional 9.58 percent increase in electricity tariffs, according the City of Cape Town council. The increase, if granted, would result in a “staggering” 22.7 percent rise in electricity prices for the year, the council said in a statement.

Eskom officials could not immediately be reached for comment.

$1 = 12.3145 rand Additional reporting by Wendell Roelf and Tiisetso Motsoeneng; Editing by James Macharia and Mark Potter

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