South Africa seeks lesser of two evils with Eskom debt options

 ·24 Mar 2021

South Africa’s National Treasury is considering whether it would be better to move a chunk of Eskom Holdings SOC Ltd’s R464 billion ($31 billion) of debt into a special-purpose vehicle or have the state take over responsibility for it directly, people familiar with the situation said.

While banks have led discussions for the last few weeks over the creation of 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, the three people said, asking not to be identified because an announcement hasn’t been made.

Under the SPV arrangement, the debt Eskom retains and any new debt it contracts would be paid off first as a priority, while that held in the SPV, which could have tenure of 10 years or more, would be last in line and would therefore likely need to be guaranteed by the state to win investor support, they said. That’s something the National Treasury will need to decide on, they said.

Fiscal Risk

While either option would strengthen Eskom’s balance sheet, both risk imperiling South Africa’s credit ratings by further boosting public debt, seen climbing close to 90% of gross domestic product by 2026 even without adding the utility’s liabilities.

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 considers Eskom debt guaranteed by the government as sovereign debt.

The creation of the SPV is just “a complicated way of getting to the same result as moving it onto the sovereign,” said Jones Gondo, a credit analyst at Johannesburg-based Nedbank Group Ltd.

Eskom, described by Goldman Sachs Group Inc. as the biggest threat to the South African economy, has become mired in debt as a result of overspending on projects. The utility can’t meet its costs and is subjecting the country to intermittent power outages as a result of inadequate maintenance at its aging fleet of coal-fired power plants.

If swapping Eskom debt for debt issued by the SPV were deemed voluntary, it wouldn’t be regarded as an involuntary change in control which would trigger a default. The SPV may be managed by the Public Investment Corp., which is state owned and is Africa’s biggest fund manager.

Eskom is not considering any default on its outstanding debt and remains in “constant discussions with the relevant stakeholders” to find a sustainable balance-sheet solution, the utility said in response to Bloomberg’s emailed questions. The National Treasury directed inquiries to Eskom.

Yields on the utility’s unsecured 2028 dollar bonds have climbed 51 basis points this month to 6.88%, widening the spread over sovereign debt to about 45 basis points.

“Ultimately there is only one option and we are honing in on that: the sovereign taking the risk,” said Peter Attard Montalto, the London-based head of capital-markets research at Intellidex UK Ltd. “All the structures etc. are by-the-by.”

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