Debt-Service Bailout May Ease Eskom's Woes, Morgan Stanley Says

(Bloomberg) -- Eskom Holdings SOC Ltd. may need a debt-service bailout to survive its liquidity crunch, Morgan Stanley said as the state power company struggles under a debt load of 419 billion rand ($29 billion) after years of mismanagement.

Eskom told bond investors in London last week it wants to transfer some liabilities to the Treasury. But that’s not feasible since it would “very likely” trigger a credit-rating downgrade of South Africa and capital outflows, according to Eurasia, a New York-based risk consultancy. A suggestion by Alan Pullinger, the head of FirstRand Ltd., that Eskom sell two huge coal-fired plants will be tricky since the government may prevent any investor from cutting jobs.

Morgan Stanley proposes something else: the National Treasury could pay some of Eskom’s debt-service costs for a set amount of time. That would be akin to bailing out the company and improving its cash flow at a lower cost to the government.

“In terms of quantum, this could be similar to what an equity injection would have been anyway -- Eskom debt service costs for the six months ended September 2018 were 15.2 billion rand -- but with the added benefit of control over what the injection is being used for,” Andrea Masia, a Johannesburg-based economist at the Wall Street bank, said in a note to clients.

Debt-Service Bailout May Ease Eskom's Woes, Morgan Stanley Says

Whatever the government decides, it will probably have to act fast. Masia said that Eskom’s financial trouble was “the most common topic investors wanted to talk about” last week. The Eurobond market reflects their angst. Eskom’s $500 million of notes maturing in Aug. 2028, which aren’t guaranteed by the state, are yielding 9.5 percent, near a record high.

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