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All municipalities buy their energy in bulk from Eskom and, according to Nersa’s guideline, this constitutes around 74% of the tariff. Image: Bloomberg
- The PIC could be the key to bailing out Eskom in debt, as it owns the most cash available from SA.
- While international investors are encouraging efforts to come up with a durable solution for Eskom, the idea of leveraging the fund is already generating warnings about the potential consequences.
- Plans to rescue Eskom, which has said it cannot afford to repay more than 200 billion rand of debt, have also included Dive into the surpluses of the state unemployment and compensation funds and the conversion of part of its debt, mostly guaranteed by the government, into sovereign bonds.
South Africa’s largest source of available cash, 1.91 trillion rand in civil servant pensions and unemployment funds managed by the Public Investment Corporation, looms as the key to salvaging the debt-ridden national energy monopoly.
The fund manager has approached its parent agency, the National Treasury, with a proposal to ease the burden of R464 billion obligations crushing Eskom, indicating that officials are preparing for the complex financial and political operation. to convert around R95 billion of Eskom’s debt to Eskom. the PIC in equity.
“Due diligence is still needed to confirm the viability of this proposal,” the Treasury said in a Dec. 11 response to questions from Bloomberg, its first statement connecting the PIC to an Eskom bailout. “It is important that the PIC has space to follow its internal governance processes in line with its standard investment appraisal process to mitigate any potential governance breaches or what could be perceived as political interference.”
While international investors are encouraging efforts to come up with a durable solution for Eskom, the idea of tapping into the fund is already generating warnings about the possible consequences. The swap, which could put Eskom in technical default, would pit the government against its own employees, set a precedent that could see other state-owned companies in crisis knocking on the PIC’s door, and shake the private sector worried that their money could be the next. .
Speculation about a role for PIC has intensified in recent weeks since President Cyril Ramaphosa told Bloomberg that “innovative ideas” were being discussed, and Finance Minister Tito Mboweni said the fund was willing to contribute to a solution for Eskom. Workers, companies and the government agreed last week to work together to reduce the company’s debt in the so-called Eskom Social Pact.
“The sustainability of Eskom’s debt and the risks it poses to state finances are sparking political interests that are increasingly interested in finding a solution,” said Peter Attard Montalto, head of capital markets research at Intellidex. “Eskom’s debt must be resolved.”
The decision to start installing new steam generators at the Koeberg plant near Cape Town underscores state company Eskom’s confidence that it will win approval to extend production of low-emission nuclear power until the middle of the century.
The scope of the task has grown since Goldman Sachs Group described the utility in 2017 as the biggest threat to South Africa’s economy, which has just emerged from its longest recession in 28 years. Eskom’s inability to provide reliable power since 2008, when outages began, has cut production and disrupted everything from aluminum smelters to domestic kitchens.
The deterioration was compounded by years of looting under Ramaphosa’s predecessor Jacob Zuma, leading to the 2019 bailout that totaled R128 billion over three years. But that’s simply keeping the wolf out of the gate and the search for a long-term solution is underway for the operation too big to fail.
‘Materially cheap’
Plans to bail out Eskom, which has said it cannot afford to pay more than 200 billion rand of debt, have also included diving into surplus state unemployment and compensation funds and converting part of its mostly secured debt. by the government, in sovereign bonds. .
Credit analysts have been talking about Eskom as one of the top 2021 picks, citing government efforts, says Lutz Roehmeyer, chief investment officer at Capitulum Asset Management GmbH in Berlin, which owns Eskom dollar bonds and adds no more. . “Investors are very optimistic about the name and hope that the sovereign will solve the problem,” he said.
JPMorgan Chase & Co. this week called Eskom bonds “materially cheap” compared to sovereign debt.
“As debt declines and becomes more sustainable, that’s really the number one priority,” said Guido Chamorro, co-head of emerging markets hard currency debt at Pictet Asset Management in London, which manages $ 10 billion in country assets. Developing. , including the Eskom 2028 notes. “There are 101 different ways to do it. I mean, the government, as the sole shareholder, could even take on the debt. Or use its lower financing costs to borrow and then transfer the funds to Eskom.” .
The PIC is reeling from a government investigation last year into how political meddling influenced decision-making. The investigation prompted the departure of several top executives following revelations that included bailing out one of the nation’s largest retailers ahead of a national election against the advice of its investment professionals.
While the South African Congress of Trade Unions, a key ally of the ruling African National Congress, has endorsed the use of PIC funds to help Eskom, other labor groups, including the 235,000-member Public Servants Association, and business leaders have opposed. .
Eskom’s own employee pension fund has shown resistance to the idea. He does not want to change the “risk-return characteristics” of his R2 billion investment in the company’s debt or increase the stake, said chief investment officer Ndabezinhle Mkhize.
Traps
All the options being considered have their pitfalls. A debt-for-equity swap may need to be offered to all creditors and may be classified by rating agencies as a default. Converting Eskom’s debt into sovereign bonds could flood the market and make holders of South Africa’s R2.62 trillion junk-rated government bonds nervous.
“We could downgrade by one or more notches if the utility undertakes a debt restructuring, which, in our opinion, could amount to a default,” Standard & Poors’ said in a Nov. 25 statement.
Eskom CEO Andre de Ruyter has taken credit for improving operations since he took over in January, but has said the debt issue is in the hands of the government. You have talked about using green finance to help reduce your use of coal and reduce your debt. He did not give details.
Ultimately, as unpleasant as it may be, the government may find that it only has to meet the obligations of the utility company by paying its debt when due.
“Everybody knows that Eskom needs to do something about its debt, nobody knows what that looks like,” said Olga Constantatos, head of credit at Futuregrowth Asset Management, which manages R194 billion, including Eskom’s debt. “He’s in a utility death spiral as well as a debt spiral.”
