{"id":457740,"date":"2020-12-18T09:53:30","date_gmt":"2020-12-18T07:53:30","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=457740"},"modified":"2020-12-18T09:55:26","modified_gmt":"2020-12-18T07:55:26","slug":"pensions-and-unemployment-funds-seen-as-key-to-rescuing-eskom","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/energy\/457740\/pensions-and-unemployment-funds-seen-as-key-to-rescuing-eskom\/","title":{"rendered":"Pensions and unemployment funds seen as key to rescuing Eskom"},"content":{"rendered":"

South Africa\u2019s biggest pot of available cash – R1.91 trillion of civil-servant pensions and unemployment funds managed by the Public Investment Corporation – is emerging as the key to rescuing the debt-stricken national power monopoly.<\/p>\n

The money manager has approached its parent agency, the National Treasury, with a proposal to ease the R464 billion load of obligations crushing Eskom, signalling officials are gearing up for the complex financial and political operation to convert about R95 billion of Eskom debt held by the PIC into equity.<\/p>\n

\u201cThere\u2019s still a need to undertake a due diligence to confirm the viability of this proposal,\u201d the Treasury said in a 11 December response to questions from Bloomberg, its first statement connecting the PIC to an Eskom bailout.<\/p>\n

\u201cIt is important that the PIC be allowed space to follow its internal governance processes in line with its standard investment evaluation process to mitigate against any possible breach of governance or what could be perceived as political interference.\u201d<\/p>\n

While international investors are cheering efforts to contrive a durable fix for Eskom, the idea of tapping the fund is already drawing warnings over the potential fallout.<\/p>\n

The swap, which could put Eskom into technical default, would pit the government against its own employees, set a precedent that could see other flailing state-owned companies knocking on the PIC\u2019s door and rattle a private sector concerned that its money could be next.<\/p>\n

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Speculation of a PIC role has intensified in recent weeks since president Cyril Ramaphosa told Bloomberg that \u201cinnovative ideas\u201d were being discussed, and Finance Minister Tito Mboweni said the fund was willing to contribute to a solution for Eskom.<\/p>\n

Labour, business and the government last week agreed to work jointly to reduce the utility\u2019s debt in the so-called Eskom Social Compact.<\/p>\n

\u201cThe sustainability of Eskom\u2019s debt and the risks it poses to state finances are now arousing political interests who are increasingly interested in grasping a solution,\u201d said Peter Attard Montalto, head of capital markets research at Intellidex. \u201cEskom\u2019s debt needs to be solved.\u201d<\/p>\n

The scope of the task has increased since Goldman Sachs Group Inc. described the utility in 2017 as the biggest threat to South Africa\u2019s economy, which is just exiting its longest recession in 28 years.<\/p>\n

Eskom\u2019s inability to provide reliable power since 2008, when outages began, has crimped output and disrupted everything from aluminium smelters to household kitchens.<\/p>\n

The deterioration was worsened by years of looting under Ramaphosa\u2019s predecessor, Jacob Zuma, leading to the 2019 bailout that totalled R128 billion over three years.<\/p>\n

But that\u2019s merely keeping the wolf from the door and the search for a long-term solution is underway for the too-big-to-fail operation.<\/p>\n

\u2018Materially Cheap\u2019<\/strong><\/p>\n

Plans to rescue Eskom, which has said it can\u2019t afford to service more than R200 billion of debt, have also included dipping into\u00a0the surpluses of state-run unemployment and compensation funds and converting some of its mostly government-guaranteed debt into sovereign bonds.<\/p>\n

Credit analysts have been talking up Eskom as a 2021 top pick, citing the government\u2019s efforts, says Lutz Roehmeyer, the chief investment officer at Capitulum Asset Management GmbH in Berlin, who holds Eskom dollar bonds and isn\u2019t adding any more.<\/p>\n

\u201cInvestors are very bullish on the name and expect the sovereign to solve the problem,\u201d he said.<\/p>\n

JPMorgan Chase & Co this week called Eskom bonds \u201cmaterially cheap\u201d compared with sovereign debt.<\/p>\n

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\u201cAs long as debt declines and becomes more sustainable, that\u2019s really the number one priority,\u201d said Guido Chamorro, co-head of emerging-market hard-currency debt at Pictet Asset Management in London, which manages $10 billion in developing-nation assets, including Eskom 2028 notes.<\/p>\n

\u201cThere are 101 different ways to do it. I mean, the government as the sole shareholder could even assume the debt. Or use its lower funding costs to borrow and then transfer the funds to Eskom.\u201d<\/p>\n

The PIC is recovering from a government inquiry last year into how political meddling influenced decision-making.<\/p>\n

The probe led to the departure of several senior executives following disclosures that included bailing out one of the country\u2019s biggest retailers ahead of a national election against the advice of its investment professionals.<\/p>\n

While the Congress of South African Trade Unions, a key ally of the ruling African National Congress, has backed using PIC funds to help Eskom, other labour groups, including the 235,000-member Public Servants Association, and business leaders have opposed it.<\/p>\n

Eskom\u2019s own employee pension fund has signalled resistance<\/span> to the idea. It doesn\u2019t want to change the \u201crisk-return characteristics\u201d of its R2 billion investment in the company\u2019s debt or add to the holding, said chief investment officer Ndabezinhle Mkhize.<\/p>\n

Pitfalls<\/strong><\/p>\n

All of the options being considered have their pitfalls. A debt-to-equity swap may have to be offered to all creditors and could be classified by ratings firms as a default.<\/p>\n

Converting Eskom debt into sovereign bonds could flood the market and unnerve holders of South Africa\u2019s R2.62 trillion of junk-rated government bonds.<\/p>\n

\u201cWe could lower the rating by one or more notches if the utility undertakes a debt restructuring, which, in our view, could be tantamount to a default,\u201d Standard & Poors\u2019 said in a 25 November statement.<\/p>\n

Eskom CEO Andre de Ruyter has been credited with improving operations since taking over January but has said the debt question is in the hands of the government.<\/p>\n

He has spoken of using green finance to help reduce coal use and cut its debt. He didn\u2019t give specifics.<\/p>\n

Ultimately, unpalatable as it might be, the government may find it just has to meet the utility\u2019s obligations by paying off its debt at it falls due.<\/p>\n

\u201cEverybody knows Eskom needs to do something about its debt, no one knows what that looks like,\u201d said Olga Constantatos, head of credit at Futuregrowth Asset Management, which has R194 billion under management, including Eskom debt. \u201cIt\u2019s in a utility death spiral as well as a debt spiral.\u201d<\/p>\n

\n

Read: Eskom forecasts annual loss of R22 billion<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

South Africa\u2019s biggest pot of available cash – R1.91 trillion of civil-servant pensions and unemployment funds managed by the Public Investment Corporation – is emerging as the key to rescuing the debt-stricken national power monopoly.<\/p>\n","protected":false},"author":59,"featured_media":101676,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9874],"tags":[1164,26,4080],"class_list":["post-457740","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-energy","tag-eskom","tag-headline","tag-intellidex"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/457740","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/59"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=457740"}],"version-history":[{"count":5,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/457740\/revisions"}],"predecessor-version":[{"id":457766,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/457740\/revisions\/457766"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media\/101676"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=457740"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=457740"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=457740"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}