Eskom’s quickest fix is giving it cash now, swapping debt later

Ask Nedbank Group Chief Executive Officer Mike Brown how to save South Africa’s beleaguered state-owned power utility and his approach is simple: first give it cash and then consider a debt-to-equity swap later.

Eskom is paying so much in interest on its debt – at the same time that its income is falling – that the company is struggling to keep the country’s lights on. To ease the firm’s cash-flow woes, the government is planning a R230bn billion-rand bailout. While the state initially wanted to spread that over 10 years, a significant portion is now being expedited, with details expected from National Treasury on July 23.

“For all practical purposes, we don’t have any easy or good options available at this stage.” Brown said in an interview in Durban on Friday. Bringing forward the bailout package or increasing the amount “is the most practical short-term solution.”

Other suggestions are being considered to ease Eskom from the burden of more than R440bn, 70% of which is guaranteed by the state. One includes a proposal to convert debt held in Eskom on behalf of over 1 million state workers into equity, as reported by Bloomberg on July 11. Another is said to include shutting coal-fired plants early to get cheaper financing and to make way for renewable energy.

Green energy is a “possible alternative but incredibly complicated to implement and likely to take three to five years to get up and running,” Brown said. “Eskom has a six-month problem.”

‘Board Fights’

While “some form of switch where Eskom bondholders would be able to switch Eskom bonds for government bonds” presents a potential answer, it is also complex and would take longer to get done than releasing the bailout funding through the special appropriations bill, the CEO said.

The Public Investment Corporation, which manages about R2.2bn mainly in civil servants’ pensions, might take a hit should the Eskom’s debt it holds be converted to shares, said Richard Segal, a London-based senior emerging-markets analyst at Manulife Asset Management.

“The equity value would likely be lower than the debt value,” he said. “This might not sit well” with trustees of the retirement funds.

It could lead to some positive changes at Eskom if PIC gains board representation and some management control, Segal said, “although it could also lead to board fights, which make the situation worse.”

Eskom would need to be completely reorganised for a debt-to-equity switch to happen, which could still be years away, said Darias Jonker, a London-based director at consultant Eurasia Group, especially considering labour organisations are completely opposed to any reconfiguration at Eskom. A World Bank study in 2016 found the company needs to cut 66% of its workforce.

“There will not be a definitive deal to make the debt sustainable, in other words, debt that can be wholly serviced from Eskom’s revenue in the next 12-24 months,” he said. Even the “enhanced bailout” scheduled to be detailed in coming weeks, “will not be enough to make the debt sustainable.”

While Nedbank’s Brown is optimistic, the government will have to make hard decisions, with the burden ultimately falling on the South African public to shoulder the bill.

“Eskom can be saved but I don’t believe a Eskom in its current model is appropriate for South Africa into the future,” he said. “It will be about the business model on the one hand and paying the price for Eskom’s debt levels. Taxpayers are the only place Eskom will go to for funding over time.”