Eskom takes steps to plug R399 billion debt hole

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

Eskom Holdings SOC Ltd had R399 billion ($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%.

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 R100
billion 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 R600 billion within
four years, the company said on Monday. It reported a loss of
R2.3 billion 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.

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Read: Eskom counts R2.3 billion in
losses as irregular spending blows up to R19.6
billion