The National Treasury is formulating a plan to transfer a significant portion of Eskom’s almost R400bn debt load to its own balance sheet in an attempt to find a sustainable solution to the state-owned power utility’s debt crisis.
Eskom’s bonds rallied on the news, which was first reported by Bloomberg. The development is likely to make it easier for the power utility to raise cheaper financing to fund much-needed expenditure on maintenance and possible further investment in generating capacity.
The news comes just three days after President Cyril Ramaphosa announced a plan to end load-shedding.
While Ramaphosa’s Monday night address did not specifically mention the Treasury taking over a portion of Eskom’s debt, he referred to a “sustainable solution” to the utility’s debt burden, adding that details would be unveiled by finance minister Enoch Godongwana in his medium-term budget policy statement (MTBPS) later this year.
Duncan Pieterse, head of assets and liability management at the Treasury, confirmed the plan to Business Day and said the first step is to establish the quantum of debt relief that will be required to make Eskom a sustainable entity. He added that the Treasury has conducted a financial modelling exercise that has been independently tested to establish the exact quantum of debt relief required to put Eskom on the path to long-term financial stability under a range of different assumptions.
“The financial modelling part of the work has progressed and that is almost concluded,” said Pieterse. “We have just appointed legal counsel to help us go through the various legal agreements and loan covenants and understanding the implications of different kinds of debt. The idea is then to put together a package that is credible.”
Nevertheless, Pieterse added that dealing with Eskom’s debt is only one aspect of a broader set of initiatives aimed at making it a sustainable entity.
These initiatives may include “pre- and post-conditions” that would have to be fulfilled by the utility in exchange for the Treasury’s debt assistance.
“If you only deal with the debt, but don’t deal with the overall structural challenges that Eskom has, then there is a very big likelihood that the entity will just return to the fiscus for further support in the future,” said Pieterse.
“So, the second part of the work is about what we call the pre- and post-conditions that have to be met, so that you have a credible debt relief transaction. Those are the things that need to be done before the transaction is executed as well as after the transaction is done.”
While the conditions set by the Treasury would need to be fulfilled by Eskom, the plan would also require further policy and regulatory reform to ensure the sustainability of SA’s electricity sector well into the future. The Treasury’s debt relief proposal for Eskom will also have to be subjected to SA’s normal budgetary processes, which will require its incorporation into the national fiscal framework as well as final approval by the finance minister, cabinet and parliament.
October
Mfuneko Toyana, a spokesperson for the Treasury, told Business Day that final details of the debt relief plan are likely to be announced during the MTBPS in October. This is expected to include the percentage of the power utility’s debt that will be transferred to the Treasury’s balance sheet.
“There are processes under way,” said Toyana.
The Treasury “is looking at the modality of it and this would need to go through cabinet first and get cabinet approval”.
While this will alleviate the financial pressure on Eskom, it will add to the state’s overall fiscal debt load, which could have implications for the country’s overall debt-to-GDP ratio, depending on how much of Eskom’s debt load is absorbed by the Treasury.
Apart from a likely reversal in some of the improvements in SA’s overall fiscal position, the debt-relief plan for Eskom may embolden other highly indebted state-owned enterprises such as Transnet, Prasa and Land Bank to request similar state assistance. If that happens, it would place an even greater burden on state finances and taxpayers.
However, the Treasury’s proposal is likely to be welcomed by Eskom’s senior management, such as CEO André de Ruyter, who has been under fire of late due to the utility’s worst series of power cuts yet.
Eskom has been forced to impose countrywide rolling blackouts for much of this year, culminating in stage 6 load-shedding earlier this month, due to a combination of breakdowns at its ageing plants and the effect of a wildcat strike.
Bonds
Eskom’s bonds rallied on news of the debt-relief plan, with the yield on the 8.45% security due 2028 plunging 1.63 percentage points to 10.99% by 3.13pm local time, putting it on course for its lowest close since June 16. Yields move inversely to bond prices.
With Bloomberg News
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