Will the PIC rescue the sick Eskom?

DEAL

South Africa’s largest available cash deposit, 1.91 trillion rand in civil servant pensions and unemployment funds managed by the Public Investment Corporation (PIC), looms as the key to bailing out the Eskom energy company, that is in debt.

The money manager has approached the National Treasury with a proposal to ease the burden of obligations of R464 billion that crushes Eskom, indicating that officials are preparing for the complex financial and political operation to convert around R95 thousand million of Eskom’s debt held by the PIC in equity.

“Due diligence is still required 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 ​​turning to pension funds 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, setting a precedent that could see other state companies in crisis knocking on the PIC’s door.

This could also unsettle a private sector concerned that their money will be next.

Speculation about a role for PIC has intensified in recent weeks since President Cyril Ramaphosa said “innovative ideas” were being discussed and Finance Minister Tito Mboweni said the fund was willing to contribute to a solution for Eskom.

Last week, workers, companies and the government agreed to work together to reduce the electricity utility’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 the interest of politicians, who are increasingly interested in finding a solution,” said Peter Attard Montalto, Head of Market Research at Intellidex capital.

Eskom’s debt must be resolved.

The scope of the task has increased since 2017, when Goldman Sachs described the power company as the biggest threat to the economy, which has just emerged from its longest recession in 28 years.

Read: Move Eskom Debt to State Balance Sheet, Says Former Goldman Chief

Eskom’s inability to provide reliable power since 2008, when the blackouts began, has reduced production and disrupted everything from aluminum smelters to domestic kitchens.

‘MATERIALLY CHEAP’

The deterioration was compounded by years of looting under Ramaphosa’s predecessor Jacob Zuma, leading to the ransom last year totaling 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.”

Plans to bail out Eskom, which has said it cannot afford to pay more than $ 200 billion in debt, have included plunging into surpluses of state unemployment and compensation funds and converting part of its debt, mostly guaranteed by the government, in sovereign bonds.

Credit analysts have been talking about Eskom as one of the top picks for next year, citing government efforts, says Lutz Röhmeyer, chief financial officer at Capitulum Asset Management in Berlin, Germany, which owns Eskom dollar bonds and adds no more. .

“Investors are very optimistic about the name [Eskom] and wait for the sovereign to solve the problem, “he said.

JPMorgan Chase & Co this week called Eskom bonds “materially cheap” compared to sovereign debt.

The PIC is reeling from a government investigation last year into how political meddling influenced decision-making.

The investigation led to 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 Cosatu labor federation, a key ally of the ruling ANC, has backed the use of PIC funds to help Eskom, other labor groups, including the 235,000-member Association of Public Officials and business leaders, have opposed.

Eskom’s own employee pension fund has shown resistance to the idea.

It does not want to change the “risk-return characteristics” of its R2 billion investment in the company’s debt or increase the stake, said chief investment officer Ndabezinhle Mkhize.

MAIN ERRORS

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 lower the rating one or more notches if the utility undertakes a debt restructuring, which, in our opinion, could amount to a default,” rating agency S&P Global said last month.

Eskom Chief Executive André de Ruyter has taken credit for improving operations since taking office in January, but has said the debt issue is in the hands of the government.

Andrede Ruyter, CEO of state power company Eskom. Image: Sumaya Hisham / Reuters

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De Ruyter has talked about using green finance to help cut your coal use and reduce your debt. He did not give details.

Ultimately, as unpleasant as it is, the government may find that it only has to meet the obligations of the energy company by paying its debt when it is 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. “

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