S. Africa Will Have to Assume Eskom Debt, Rothschild Says

(Bloomberg) -- South Africa faces no choice but to assume some of the debt of its troubled power utility, Eskom Holdings SOC Ltd., said Martin Kingston, the chief executive officer of Rothschild & Co.’s operations in the country.

The state-owned company has incurred debt of 419 billion rand ($29 billion), which it is struggling to service, and inadequate spending on maintenance of its power plants has led to a series of scheduled power cuts this month and a warning of more to come for several months, potentially harming economic growth. It has proposed that the government take over 100 billion rand of that debt, according to a fund manager who attended meetings with Eskom executives in London.

“The debt on their balance sheet is unsustainable and it can only be addressed by the providers of capital taking a write-off, unacceptably high tariffs or the debt being taken on by a third party” with that being government, Kingston said.

South Africa’s government has said its working with Eskom to resolve the debt crisis, adding any solution should be “deficit neutral” and ruling out the privatization of some of its assets. Analysts and bank CEOs have proposed solutions ranging from the government servicing Eskom’s debt to the utility selling its newest power generation assets.

Critical Utility

“It’s not credible to assume that Eskom could be allowed to default or become a major risk to the system,” he said. “The nettle that needs to be grasped is that we have a critical utility of which the fundamental health of South Africa depends.”

Most of Eskom’s borrowings are guaranteed by the government and taking on more debt could push the country’s credit ratings further into junk. Kingston said he believes ratings companies would have taken Eskom’s debt and the need for a possible rescue by the government into account when making their assessments.

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