View from London: Even with half current debt, Eskom not sustainable
South Africa's debt-ridden power utility, Eskom reported a record annual loss of R20.7bn at the end of July. To keep it afloat the government has committed a R128bn bailout over the next three fiscal years. Despite expectations that the Government will move forward in splitting up the utility into three units; no announcement has been forthcoming. This week, Energy Minister Gwede Mantashe said he believed that the unions which remain one of the stumbling blocks in moving forward with Eskom's plans, would come around to supporting the plan. In an interview with Nick Smith-Saville, the Global Head of Credit Research at Debtwire, he said even at half its current debt burden, he believes Eskom is not sustainable but at least clear steps were being taken for sustainability. – Linda van Tilburg
Nick Smith-Saville said that the most recent financial statements of Eskom had been expected, given the severe challenges that Eskom was facing. "It will take time to turn around this business." He thinks it is too early to expect an improvement in the reported numbers. Saville-Smith did not want to comment on where Eskom would have been if it kept its previous management, but said that the dollar bond that was issued last year when Eskom came to the market started trading down almost immediately after being issued on a low to mid 90s level. It became clear that a concerted effort would be needed in turning around Eskom.
The Chief Financial Officer Calib Cassim had stated that Eskom needed to cut its debt by half and that the government needed to take over 50% of debt but Smith-Saville said even if you reduced Eskom's debt by half, the business would still be nearly eight times levered, eight times its annual profits to its debt. That was substantially above where other power generating and transmission companies were levered. Coupled with that, there was the significant investment needed at Eskom; it had to refurbish its fleet, it had to invest into a new generation of capacity utilisation and execute on the resource plan to ensure that its generating capacity was sustainable for South Africa into the middle of the century and beyond.
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