Big Eskom move needed in the Budget – even R200bn in debt relief not enough, warns investor

Specialist asset manager Futuregrowth, a large investor in government debt, has warned that the debt relief for Eskom that is expected in Wednesday’s budget must be fair to all types of creditors and big enough – well above 50% – to restore the company to sustainability.

Finance Minister Enoch Godongwana has said that government will relieve Eskom of one-third to two-thirds of its debt. The mechanism how is keenly awaited by investors and will be revealed when the Budget is tabled in Parliament on Wednesday. The options include a voluntary swap of a large chunk of Eskom debt to government debt or annual debt takeovers, of, say, R50 billion a year.

But warns Futuregrowth, government needs to go big – even taking 50% of Eskom’s debt will not be enough – if the company is expected to service its debt costs in the future.

In an article by Futuregrowth’s head of credit, Olga Constantatos, the asset manager says that the debt solution must meet several requirements.

First, all debt holders must be treated the same, and no one set of creditors advantaged or disadvantaged over others.

Eskom has various types of debt, including domestic bonds, bonds issued in foreign markets, some guaranteed and some not, and loans from development finance institutions, all of which have different conditions and mature at different times.

Says Constantatos:

On the quantum, Constantatos says that in the past financial year, Eskom’s debt service costs stood at R33 billion, but earnings before interest and tax came to R11.3 billion. This means that halving Eskom’s debt and, therefore, its debt services costs to around R16.5 billion would still leave a R5 billion debt service gap that Eskom would be unable to meet.

“This underscores the harsh reality that, while removing up to R200 billion of Eskom’s debt is indeed a meaningful number, Eskom’s return to financial sustainability will require more than just this one intervention,” she says.

The conditionalities of the arrangement must be clearly communicated and transparently managed, and the market must be kept updated on the status of the conditions.

The Treasury should also inform investors of its “Plan B” should the offer to creditors not be sufficiently taken up in the event that the conditions are not considered attractive enough.

Constantatos also weighs up the pros and cons of the mechanism that Treasury may use.

While an immediate swap of a lump sum – say R200 billion – will provide Eskom with immediate cash flow relief and positively impact the company, it would be more difficult for Treasury to ensure that its conditions are met, after the money has flowed.

A staggered relief would allow for better management of the conditions but has the drawback of not providing immediate, meaningful cashflow relief for Eskom, which may lead to Eskom’s financial unsustainability remaining a reality for the foreseeable future.

Apart from debt relief there are other elements that are essential to rebuilding Eskom’s sustainability, she warns. Without them, Eskom debt would mount up again. These include: cost-reflective tariffs, increased cost efficiencies, and addressing municipal arrears.

“Delays, half-measures and ‘kicking the can down the road’ are not going to get the results the nation needs. Bold, urgent and integrated intervention on Eskom is extremely overdue. This is what we are looking for when the Minister rises to speak on Wednesday,” she says.