By Roxanne Henderson and Paul Burkhardt
(Bloomberg) –Â Ask Nedbank Group Ltd. Chief Executive Officer Mike Brown how to save South Africaâs beleaguered state-owned power utility and his approach is simple: first give it cash and then consider a debt-to-equity swap later.
Eskom Holdings SOC Ltd. 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 countryâs lights on. To ease the firmâs cash-flow woes, the government is planning a R230bn ($16bn) 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.
âFor all practical purposes, we donât have any easy or good options available at this stage.â Brown said in an interview in Durban on South Africaâs east coast on Friday. Bringing forward the bailout package or increasing the amount âis the most practical short-term solution.â
Other suggestions are being considered to ease Eskom from the burden of more than R440bn of debt, 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 âpossible alternative but incredibly complicated to implement and likely to take three to five years to get up and running,â Brown said. âEskom has a six-month problem.â
âBoard fightsâ
While âsome form of switch where Eskom bondholders would be able to switch Eskom bonds for government bondsâ 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 Corp., which manages about $150bn mainly in civil servantsâ pensions, might take a hit should the Eskomâs debt it holds be converted to shares, said Richard Segal, a London-based senior emerging-markets analyst at Manulife Asset Management.
âThe equity value would likely be lower than the debt value,â he said. âThis might not sit wellâ 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, âalthough it could also lead to board fights, which make the situation worse.â
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 Ltd., especially considering labor 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.
âThere will not be a definitive deal to make the debt sustainable, in other words, debt that can be wholly serviced from Eskomâs revenue in the next 12-24 months,â he said. Even the âenhanced bailoutâ scheduled to be detailed in coming weeks, âwill not be enough to make the debt sustainable.â
While Nedbankâs 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.
âEskom can be saved but I donât believe a Eskom in its current model is appropriate for South Africa into the future,â he said. âIt will be about the business model on the one hand and paying the price for Eskomâs debt levels. Taxpayers are the only place Eskom will go to for funding over time.â