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Eskom cannot be allowed to fail, experts say. Photo: Getty Images
- The Treasury is considering shifting some of Eskom’s R464bn debt to a special purpose vehicle or holding the state accountable.
- While either option would strengthen Eskom’s balance sheet, both run the risk of jeopardizing South Africa’s credit ratings by further boosting public debt.
- Eskom, described by Goldman Sachs as the biggest threat to the South African economy, has gone into debt as a result of overspending on projects.
The National Treasury is considering whether it would be better to move a portion of Eskom’s R464 billion debt to a special purpose vehicle (SPV) or have the state take over directly, people familiar with the situation said.
While banks have led discussions in recent weeks about creating a so-called SPV that would take over at least R100 billion of Eskom’s debt, and possibly much more, that debt would almost certainly have to be guaranteed by the government, he said three people, asking not to be identified because no announcement has been made.
Under the SPV agreement, the debt that Eskom holds and any new debt it takes out would be paid off first as a priority, while that held in the SPV, which could have a tenure of 10 years or more, would be last in line and Therefore, they probably need to be guaranteed by the state to win investor support, they said. That is something the National Treasury will have to decide on, they said.
Tax risk
While either option would strengthen Eskom’s balance sheet, both risk jeopardizing South Africa’s credit ratings by further boosting public debt, which is estimated to increase close to 90% of gross domestic product by 2026 even without. add the liabilities of the utility company. That makes the stance of major rating companies on any Eskom debt deal a factor in the government’s deliberations, the people said. Moody’s Investors Service already treats Eskom’s government-guaranteed debt as sovereign debt.
Creating the SPV is simply “a complicated way to get the same result as transferring it to the sovereign,” said Jones Gondo, a credit analyst at Johannesburg-based Nedbank Group Ltd..
Eskom, described by Goldman Sachs as the biggest threat to the South African economy, has gone into debt as a result of overspending on projects. The utility company cannot cover its costs and is subjecting the country to intermittent power outages as a result of improperly maintaining its aging fleet of coal-fired power plants.
If the exchange of Eskom debt for debt issued by the SPV were considered voluntary, it would not be considered an involuntary change of control that would cause a default. The SPV can be managed by the Public Investment Corporation, which is state-owned and is the largest fund manager in Africa.
Eskom is not considering any defaults on its outstanding debt and remains in “constant discussions with relevant stakeholders” to find a sustainable balance solution, the company said in response to emailed questions from Bloomberg. The National Treasury directed inquiries to Eskom.
Yields on the utility’s 2028 unsecured dollar bonds have risen 51 basis points this month to 6.88%, widening the spread on sovereign debt to about 45 basis points.
“Ultimately, there is only one option and we are focusing on that: the sovereign bears the risk,” said Peter Attard Montalto, London-based head of capital markets research at Intellidex. “All structures, etc. are by the way.”
-With assistance from Roxanne Henderson.
