R100 billion Eskom debt transfer could happen: analyst

As South Africa grapples with Eskom’s liquidity issues, load shedding, and the very real risk of collapse, stakeholders are looking to president Cyril Ramaphosa and finance minister Tito Mboweni for answers on how government plans to pull back from the crisis.

One of the ways to accomplish this, was suggested by Eskom itself, saying that government shoul help bail it out of crisis by transferring R100 billion of the group’s debt over to government debt.

Eskom chairman Jabu Mabuza made the proposal in an interview during an investor roadshow in December 2018, but was met with an icy response from ratings agencies and the president.

Economists have warned that such a move could result in an immediate downgrade to junk status by ratings agency Moody’s, while Ramaphosa said that the debt swap could lead to even more problems.

At the time it was first suggested, Moody’s said that a debt transfer will likely increase the government’s debt levels by around two percentage points, and would put immense pressure on how the government handles Eskom after the fact.

The credit implications for the country would depend on whether effective measures are taken to improve Eskom’s financial health and reduce future contingent liability risks for the government, it said.

Public Enterprises Minister Pravin Gordhan said this week that, at R420 billion, Eskom’s debt represented 15% of all sovereign debt and that a default would threaten the economy.

President Ramaphosa has already announced that government plans to unbundle Eskom and split it into three entities in a bid to bring its financial crisis under control – and during his state of the nation address confirmed that Treasury would provide more financial support.

The exact quantum of that support is expected to be announced in finance minister Tito Mboweni’s budget speech next week.

Debt transfer likely to happen

In a note published ahead of the 2019 budget, Intellidex analyst Peter Attard Montalto said that there are several options open to government to intervene at Eskom and handle the more immediate threat posed by the hole in its balance sheet.

While Ramaphosa’s unbundling plan is on everyone’s mind, the lack of a white paper on the plan leads to some uncertainty around its implementation, which is unlikely to happen in the current financial year, he said.

Attard Montalto highlighted options – including a complex deal with the PIC, writing off debt, or even more equity injections – but said it’s a combination of a debt transfer and outside financing that is most likely to be forthcoming.

The analyst said that the ‘hole’ in Eskom’s books are between R250 billion and R300 billion (without counting the unbundling costs).

“(National Treasury) could announce the full hole is being supported by a debt transfer to the sovereign of R100 billion (or a little bit higher), and the rest of the gap is filled with equity injections as required in the coming years, to the tune of R150-200 billion. This is our baseline,” he said.

He noted that there are limits to how much debt can ‘simply’ be transferred to the sovereign (around R120 billion), and even in this scenario, this would equate to a rise in debt to GDP of around 1.9-2.3 percentage points – in line with projections from Moody’s.

Capital injections are still likely to happen, however, and existing government revenue could be moved around – though Attard Montalto said this could create other credibility issues.

One option, he said, could be to sell government’s stake in Telkom (valued at almost R15 billion) to help fund Eskom. However, even here, political barriers are seen as being too strong for this to actually happen.

In his response to the Debate on the State of the Nation Address, on Thursday Ramaphosa said that the unprecedented failure of Eskom’s generating capacity over the last few days underlines the severity of the challenges the company faces and the urgency of measures to address them.

“For those who have doubted the extent of these challenges, this week’s load-shedding has provided a hugely damaging reality check.

“There is a no single solution to the problems at Eskom – neither restructuring, nor refinancing, nor cost cutting, nor tariff increases, nor better plant maintenance on their own will have the necessary effect.

“We need to pursue all of these measures and more, simultaneously,” the president said.

Ramaphosa said that in his budget speech next week, the Minister of Finance Tito Mboweni will detail the measures that government will undertake to assist Eskom to stabilise its finances.

Read: Rand back above R14 to the dollar as Eskom’s ‘death spiral’ hits home