🔒 Eskom split could light up foreign investment – Debtwire’s Haffenden

LONDON — If anybody doubted the seriousness of Eskom’s crisis, there was another dark reminder in the form of Stage 4 load shedding. President Cyril Ramaphosa announced a range of measure that he is considering to switch on the lights; more details will be in the budget speech. To get the overseas perspective on the state-owned entity’s prospects, we spoke to the Managing Editor of Debtwire CEEMEA, Chris Haffenden on the measures that Eskom could take to shed its debt load. He suggests that foreign investors may be interested in investing in transmission and distribution, if Eskom is split in three pieces. – Linda van Tilburg

Chris, do you think the announcements of President Ramaphosa on Eskom brings the State-Owned Enterprise (SOE) closer to a solution?
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I think it will make some difference. It actually, means there’s more transparency to see how the three entities are performing and it also would help, to some extent, in terms of Eskom and its financing, and certain parts of the business might be able to borrow more. Having that ringfence will also help to protect them from other parts of the business. A good example is the distribution network. I haven’t looked into it closely enough to see whether the environment, in terms of SA, but in other jurisdictions we have actually seen distribution businesses able to securitise and raise money via private business securitisation. So, that’s potentially one option for Eskom.

But I think the difficulty is very unclear to actually see what the long-term basis of why you’re splitting into three? Is it the case you’re looking for outside investment maybe, into some of those entities? Is it maybe a prelude to removing Eskom’s monopoly status and to, at some point, part privatise parts of the business or the opposite? It might be the case that if you feel that the generation business, as we do, is in a very dire state could you actually then use that as a mechanism to put it into some form of process? To either rundown the assets or to put them into maybe some form of pre-insolvency process.

Eskom’s officials talked about a possible debt swap with the government. Would that be a solution or do you think that is a possibility?

I think that’s probably come from leads that came from the Eskom management when they met some investors in London in December, saying that they had pitched this plan to the government that the government should take it on directly, R100bn onto its balance sheet, and that would get Eskom’s leverage may be down from 11 to 12 times, to 8 to 9 times but that’s still on, very much on the cusp of what you would look for in terms of a debt burden for an international utility. Arguably, given the fact that we’re talking about SA, rather than a fully developed Western country. Then you’d probably say then that has to be a little bit lower than that.

So, it would help. It might provide a little bit of breathing space for Eskom to maybe continue to be able to fund itself in the international markets but the difficulty is that the debt burden is increasing quite substantially each year just, as I said before, to sort of plug the gaps. So, it would only buy you maybe 18-months worth of time and then you’ll be back to the same levels as you were before and you’d have to then look at further assumption of debt by the SA Government onto its balance sheet. So, it’s not a cure-all. It just maybe buys a little bit of time.

Do you think if Eskom doesn’t get this under control, it could have an affect on SA’s credit rating?

Yes, and I think that’s why and if you look at the comments that the president made on Thursday, he was very careful to say that he didn’t want this to be a burden on the fiscus and he specifically mentioned the credit rating. Also, just from some of the comments that were made around the time that the R100bn proposal was floated, suggests that the SA government doesn’t want to take this onto its balance sheets. So, the other options it really has are either providing direct financial support or it has to extend the level of the guarantees that is given to Eskom. That they were now maxed out at the R315bn mark, after the latest set of financing that was announced, I think just a couple of weeks ago. So, that might be the other option that SA has, which is just to increase the level of the guarantees.

What do you think are the best options for Eskom, going forward?

I’d break that down a little bit into the short-term and medium-term. I think if you look at breaking the business into three I think it becomes very clear that the generation business is in a very bad way, and that there are going to have to be question marks about whether you want to continue to support the energy that you currently have and you might think a bit more closely about the useful lives of the coal fired power stations. You have to bear in mind, we’ve had a lot of unplanned outages. Again, we’ve got some more load-shedding that’s appeared this week, and a lot of this has been down to a multitude of reasons.

One, is the fact that they’ve underinvested in terms of maintaining these power plants and also, they’ve been feeding them with a much, poorer quality coal, which has caused them to break. Now, that’s already meant that there’s another R18bn that has to be spent on remedial action on these power stations. Most of these power stations are envisaged under the Independent Resource Plan that they would still operate up to 2030, and in some cases, beyond. So, if you’re spending so much money actually trying to keep these plants going the argument maybe that you should be looking at changing your energy mix and maybe shutting these plants down earlier. But that’s quite a big political decision from a security of energy perspective because it means that the options there are; you either buy power from outside of SA or you invite other non-Eskom power producers into selling electricity to the grid, which will suggest that you’re breaking up the monopoly of generating power that Eskom has within the country.

They’re thinking of getting power all the way from the DRC. Is that viable, do you think?

That is probably the biggest project financing that never happened. I think it’s been on the cards, the Inga Dams, since the early 50s. There has been movement on that of late. There has been a selection of contractors, Spanish and Chinese contractors, and I know the SA government recently said that it would take 2,500 megawatts from that plant. So, I think there’s still a lot of hoops to go through. The people we talk to, who are working closely on this project still think that significant challenges remain for this project to go ahead but yes, that is one option.

There are other options as well. You’ve got gas to power projects that could be put in place with the large gas fields that are being developed in Mozambique, which is pretty much on your doorstep. Then the recent oil and gas find that was announced by TOTAL and that again, could potentially be another fuel stock for gas to power. Gas to power is, I think, quite economically viable. Then you have the renewables program, which was very successful in SA, until the logjam that appeared with Eskom refusing to sign the IPPs for at least a couple of years but again, that’s another option is increasing the renewable share.

So, you think the 80% reliance on coal is not sustainable?

I don’t think its sustainable partly because of the fact that it might be 80% in theory, but in practice it’s less than that because of the inability for these power stations to run at or close to capacity. One thing they could announce in the budget is maybe some form of State support to the municipalities to pay arrears to Eskom, whether that’s via some more guarantee-typed structures or whether that’s hard cash, is another option. I think another leg that we have to look at is the negotiations with the Regulator regarding tariff increases, which is substantially higher than the increases that were granted in the last round. I know there’s been quite a large lobby from the mining industry, suggesting that if those increases went through that that would actually make the mining industry uneconomic.

Some of that I think is true but the other thing is, if you’re putting those amounts of increases through that probably will boost the arrears even further. So, I think there might be a combination of things that will happen. But I think one of them might be that you’ll get, and I think it’s alluded to, you might get slightly higher tariff increases to provide some form of relief to Eskom. There are international investors out there who are willing to invest in the transmission and distribution parts of the businesses, especially if they’re regulated. It gives you the ability to make monopoly profits, and I think there is a potential for that.

I’m not saying that this is going to provide a fix for Eskom but I think that might help them in terms of some of their funding. I think the real difficulty is, what do you do with the operations? What do you do with the generating assets and how do you actually get the debt level at Eskom down to a sustainable level? Because you are talking about having to, at least halve the debt level at Eskom, and there’s only two real options you have there. One is to get the SA Government to assume a large amount of debt onto its own balance sheet and fund it, in itself. Or, you have to look at a debt for equity swap, which will mean that the South African public and the government will actually have to give up their equity ownership of Eskom.

The difficulty on that as well is, if you do then ask a whole bunch of bond investors to take the pain here you’ve got to realise that a large proportion of the creditors of Eskom are either SA institutional investors or they are SA development finance institutions, such as DBSA. Another large investor is the PIC. That will have, I think, quite an impact in terms of their confidence in SA and their confidence in investing in the SA Government debt, or SA Government owned debt.

We’ve been talking to Chris Haffenden of Debtwire. Thank you so much for speaking to us.

Thank you very much, Linda.