Fixes to South Africa ‘Elephant’ Eskom Span China Loan to Debt Swap

(Bloomberg) -- South Africa is getting down to the business of fixing its debt-ridden state power utility.

Eskom Holdings SOC Ltd. had 399 billion rand ($30 billion) of debt at the end of March, according to data compiled by Bloomberg, and has been flagged by ratings companies as a key risk to South Africa’s economy. The utility has been mired in a series of scandals, struggled to raise funds and was forced to implement rolling blackouts last month after wage talks with unions broke down.

Eskom announced Tuesday it’s secured a $2.5 billion long-term loan facility from China Development Bank, giving a big boost to its fundraising efforts this year. About an hour later, a top official in the ruling African National Congress told reporters the Public Investment Corp. is in talks about converting part of the debt it is owed by the state power utility into equity.

“We’re seeing sufficient signs that management at Eskom cares about dealing with the problem and we’re seeing progress,” said Darias Jonker, an Africa analyst at risk-advisory firm Eurasia Group. The moves are “a sufficient encouragement that Eskom is too big to fail and that a default is unlikely,” he said.

The CDB loan was announced as part of a series of investments by China in South Africa after a meeting between President Cyril Ramaphosa and his Chinese counterpart, Xi Jinping, in Pretoria. The facility takes Eskom’s secured funding to more than 60 percent of requirements for this year, Chief Executive Officer Phakamani Hadebe said.

Yields on Eskom dollar bonds due 2021 dropped 18 basis points to 6.83 percent.

Also on Tuesday, Paul Mashatile, the ANC treasurer-general, said that the party favors splitting Eskom into three parts -- electricity production, transmission and distribution.

“The company would become more manageable” if it were broken up, he told the Cape Town Press Club. “Now it is an elephant that is too big to walk.”

Mashatile also revealed that the PIC, which oversees South African government workers’ pensions, is in talks with the government and Eskom about converting part of the about 100 billion rand of the company’s debt it owns into equity. The move would support Eskom’s balance sheet and allow it to raise more money, he said.

Proper Consultation

“The process of developing a new business model is work in progress,” Public Enterprises Minister Pravin Gordhan said. “There is no doubt that both financial and structural measures will be required to make Eskom sustainable. There will be proper consultation with all stakeholders.”

Eskom’s debt is projected to increase to 600 billion rand within four years, the company said on Monday. It reported a loss of 2.3 billion rand for the year through March and said it discovered 19.6 billion rand in irregular costs, a liability largely inherited from previous leadership.

The utility is also still in wage negotiations with unions, after backing down on a refusal to offer pay increases following last month’s protests.

Eskom may consider a liability management exercise for its dollar bonds due 2021, people familiar with the matter said on Monday, asking not to named because the talks were private. Liability management involves debt investors agreeing to changes such as maturity extensions or discounted buybacks.

While the latest announcements show a determination to tackle Eskom’s problems, there’s still a long way to go, said Eurasia’s Jonker.

“Stabilizing Eskom is still very far from being realized,” he said.

©2018 Bloomberg L.P.