Eskom wants state to take on R100bn debt
Eskom is to ask the government to take R100bn of its debt onto its own balance sheet as part of a package of measures to turn the troubled company around.
While the move would give Eskom relief, it would add another two percentage points to the government’s debt-to-GDP ratio and could be seen as negative by credit ratings agencies.
Currently, Eskom operates thanks to a R350bn debt guarantee from the government, which has been flagged as the biggest risk to the fiscus.
Eskom chair Jabu Mabuza, who along with the utility’s officials is on an investor roadshow to London and the US, said in an interview on Tuesday that "cost compression, revenue enhancements and debt relief are the core of the turnaround strategy".
The size of the proposed debt relief was R100bn and would entail government "taking that into its own balance sheet".
Eskom, which supplies most of SA’s electricity, has massed R419bn of debt over the past 10 years due to its huge capital build programme.
It is now unable to pay interest costs from revenue earned and must borrow to service its debt. Interest costs over the next three years are projected to be R250bn.
Overall debt is projected to rise to R600bn over three years if debt levels are not contained.
In a sign of investors’ jitters about the utility’s finances, its $1.25bn eurobonds maturing in 2025 fell the most in two weeks on Tuesday, with the yield rising 14 basis points to 8.91%.
The yield, which moves inversely to the price, reached a 2018 low of 6.1% in February, following the appointment of a new board the month before. The benchmark government bond due 2026 barely moved.
While Eskom officials mooted the idea of R100bn of debt relief to investors in London this week, Mabuza said that they had not yet met with the Treasury to discuss the possibility of a debt bail-out.
The power utility’s turnaround plan has been submitted to cabinet for consideration.
Over the weekend at the G-20 summit in Buenos Aires, finance minister Tito Mboweni told Bloomberg news agency that Eskom should go to the bond market to raise the money it needed.
Treasury spokesperson Jabulani Sikhakane said that the government’s policy stance on the funding of state-owned companies remained that such funding must be done in a deficit-neutral manner.
At the presentation of Eskom’s interim results last week, Mabuza made the case for a state bail-out of Eskom, arguing that the company’s options were highly constrained.
The sale of assets to raise cash was not a viable strategy, Mabuza said, as Eskom’s oldest and least efficient coal stations were unlikely to attract buyers, while its newer power stations were needed to generate revenue.
Asking bond holders, particularly the Public Investment Corporation, to swap debt for equity, which six months ago had been seen as a solution, was not realistic as bond holders would not want to take equity in a loss-making company.
However, analysts are sceptical about the debt relief plan.
Credit analyst at RMB Elena Ilkova said that the plan could trigger a downgrade by credit ratings agencies. An injection of equity by the government would probably be a better option, Ilkova said.
"Both strategies would have a negative impact on the rating.
"The equity injection is less unpalatable as government could dispose of assets to find the cash, but the impact of government taking over Eskom’s debt would be immediate," she said.
Government has in the past mooted the idea of selling
its 40% stake in Telkom, valued at R12.26bn, and could also raise substantial revenue from the impending auction of broadband spectrum to the private sector.
Citibank economist Gina Schoeman said taking on R100bn of Eskom debt would raise government’s debt to GDP ratio by two percentage points. As government has been under pressure from ratings agencies to reduce debt this would have the metrics “going in the wrong direction,” she said.
“From a fiscal perspective it would be quite painful. Debt would rise and so would bond yields, which would mean that government debt service costs would increase. Debt service costs are already crowding out other spending,” said Schoeman.
Government has twice missed its targets to consolidate debt which is now expected to reach 59.6% by 2023.
Ultimately, though, the market’s response would depend on “how believable the whole package is and what Eskom will look like in three years time, ” she said.