The Treasury has mandated Citi and Nedbank to arrange a “nondeal” call with international investors directly after this week’s budget speech to update them on its debt relief plan for Eskom.
Analysts say it could be a move to calm market jitters ahead of Wednesday’s budget speech, in which it is widely expected that finance minister Enoch Godongwana will unveil plans to transfer a portion of Eskom’s R422bn debt load to the state’s balance sheet.
The Treasury’s deputy director-general of asset and liability management, Duncan Pieterse, who will lead the investor call, says it forms part of the government’s “normal approach” to postbudget investor engagement. Pieterse will be supported on the call by officials from the Treasury and Eskom.
“We decided that because there are a lot of questions about Eskom, we should have a call with investors about this,” Pieterse told Business Day. “That’s because irrespective of what we say [on Wednesday] there are going to be a lot of questions. This is not a meeting with Eskom bond investors — it is with all investors interested in any questions on Eskom issues.”
The global investor call is scheduled for Wednesday at 4pm local time, two hours after Godongwana is scheduled to begin delivering his speech. The call will be followed by a series of fixed-income investor update meetings in Cape Town on February 23 and 24; in Johannesburg on February 27; in New York on March 6; in Boston on March 7; and in London on March 9 and 10.
“Bold, urgent and integrated intervention on Eskom is urgently overdue and is what we are looking for when the minister rises to speak at 2pm on Wednesday,” said Olga Constantatos, head of credit at Futuregrowth Asset Management. “Delays, half-measures and kicking the can down the road are not going to get the results that we as a nation need.”
Constantatos said while it was normal for the Treasury to meet institutional investors in the days after the speech, it was unusual that members of Eskom’s management would be included in its Wednesday call.
Also unusual is that the planned roadshow will focus entirely on Eskom.
Pieterse said: “Typically after the budget we have roadshows. First in [Cape Town] and then in Joburg, after which we have the same roadshows with international investors. But now we are going to do a roadshow with investors on Eskom only.”
Among the things Constantatos said investors will be looking for is a clear commitment from the Treasury that all Eskom creditors will be treated fairly and that the debt relief plan will not trigger cross-defaults on other loan agreements.
The latter point is particularly important as changing the terms of a debt agreement can — in a legal sense — be deemed to constitute a debt default.
The debt relief plan will also have to carefully dance around the term “rescheduling”, a word that in the lexicon of ratings agencies could trigger a downgrade of Eskom’s credit rating. The Treasury will want to avoid this as it would immediately result in a rise in Eskom’s bond yields, a barometer of its cost of borrowing.
While the market will be eagerly awaiting details on the exact quantum of Eskom’s debt that the government is prepared to absorb, it will also want to know whether the amount is taken over immediately or staggered over several fiscal years.
“It might not be an immediate debt takeover, it could be implemented gradually over time,” said Johann Els, chief economist at Old Mutual Investment Group. “For example, the Treasury could potentially take over R50bn a year for four years. That would make it easier to enforce conditions on Eskom in exchange for the debt relief.”
Catch-22
Constantatos said Eskom’s debt relief creates a Catch-22 for the government. If it staggers the debt relief over several years, it will keep Eskom’s cash flow constrained, whereas implementing it immediately will make it difficult to impose conditions on the utility.
Eskom’s outgoing CEO, André de Ruyter, suggested in a radio interview last week that financial relief would reduce the utility’s debt servicing costs and return it to profitability.
“We’re profitable at an operating profit level, but when you add in the debt service costs that’s where we are plunged into a loss,” De Ruyter told The Money Show on Radio 702.
Update: February 20 2023
This story has been updated with more information.
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