Africa-Press – South-Africa. South Africa’s 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.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.”There’s still a need to undertake a due diligence to
confirm the viability of this proposal,” the Treasury said in an 11 December
response to questions from Bloomberg, its first statement connecting the PIC to
an Eskom bailout. “It 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.”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. 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’s door, and rattle a private sector concerned that its money could be next.Speculation of a PIC role has intensified in recent weeks
since President Cyril Ramaphosa told Bloomberg that “innovative ideas”
were being discussed, and Finance Minister Tito Mboweni said the fund was
willing to contribute to a solution for Eskom. Labour, business and the
government last week agreed to work jointly to reduce the utility’s debt in the
so-called Eskom Social Compact.”The sustainability of Eskom’s debt and the risks it
poses to state finances are now arousing political interests who are increasingly
interested in grasping a solution,” said Peter Attard Montalto, head of
capital markets research at Intellidex. “Eskom’s debt needs to be solved.”The decision to begin installing new steam generators at the
Koeberg plant near Cape Town underscores state-owned Eskom’s confidence that it
will win approval to prolong production of low-emissions nuclear power into the
middle of the century.The scope of the task has increased since Goldman Sachs
Group described the utility in 2017 as the biggest threat to South Africa’s
economy, which is just exiting its longest recession in 28 years. Eskom’s
inability to provide reliable power since 2008, when outages began, has crimped
output and disrupted everything from aluminium smelters to household kitchens.The deterioration was worsened by years of looting under
Ramaphosa’s predecessor, Jacob Zuma, leading to the 2019 bailout that totalled R128
billion over three years. But that’s merely keeping the wolf from the door and
the search for a long-term solution is under way for the too-big-to-fail
operation.READ | PIC may convert Eskom debt to equity’Materially cheap’Plans to rescue Eskom, which has said it can’t afford to
service more than R200 billion of debt, have also included dipping into the surpluses of state-run unemployment
and compensation funds and converting some of its mostly government-guaranteed
debt into sovereign bonds.Credit analysts have been talking up Eskom as a 2021 top pick,
citing the government’s efforts, says Lutz Roehmeyer, the chief investment
officer at Capitulum Asset Management GmbH in Berlin, who holds Eskom dollar
bonds and isn’t adding any more. “Investors are very bullish on the name
and expect the sovereign to solve the problem,” he said.JPMorgan Chase & Co. this week called Eskom bonds “materially
cheap” compared with sovereign debt.”As long as debt declines and becomes more sustainable,
that’s really the number one priority,” 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. “There
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.”The PIC is recovering from a government inquiry last year
into how political meddling influenced decision-making. The probe led to the
departure of several senior executives following disclosures that included
bailing out one of the country’s biggest retailers ahead of a national election
against the advice of its investment professionals.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.Eskom’s own employee pension fund has signalled resistance to
the idea. It doesn’t want to change the “risk-return characteristics”
of its R2-billion investment in the company’s debt or add to the holding, said
Chief Investment Officer Ndabezinhle Mkhize.PitfallsAll 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. Converting Eskom debt into sovereign
bonds could flood the market and unnerve holders of South Africa’s R2.62
trillion of junk-rated government bonds.”We 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,” Standard & Poors’ said in a 25 November
statement.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. He has spoken of using green finance to help reduce
coal use and cut its debt. He didn’t give specifics.Ultimately, unpalatable as it might be, the government may
find it just has to meet the utility’s obligations by paying off its debt at it
falls due.”Everybody knows Eskom needs to do something about its
debt, no one knows what that looks like,” said Olga Constantatos, head of
credit at Futuregrowth Asset Management, which has R194 billion under
management, including Eskom debt. “It’s in a utility death spiral as well
as a debt spiral.”
