Eskom changes mind on debt-to-equity conversion
Utility worries debt to equity idea may be viewed as a default by market and ratings agencies
Eskom has abandoned its plan to ask the Public Investment Corporation (PIC) to convert some of its debt to shares out of concern that it will be viewed as a default by the market.
The PIC, which invests government pension and other funds, holds R84bn in Eskom bonds, prompting Eskom’s new leadership to suggest earlier in 2018 that one way out of its financial problems would be to convert some of its debt into an ownership stake.
Eskom’s financial position is heavily weighed down by its debt burden, which totalled R387bn at the end of March and is set to increase to R600bn within four years.
The utility, which generates more than 90% of the country’s electricity, operates largely thanks to a R350bn government guarantee of its debt.
Ratings agencies have highlighted this as one of the key risks to the country’s finances.
The utility’s chair, Jabu Mabuza, told parliament’s committee on public enterprises and energy on Tuesday that following the power utility’s road show to London, New York and Boston at the beginning of August, it became clear that debt exchange would be viewed negatively by creditors.
“We at Eskom had thought that it might not be a bad idea, but we have since become aware that it might trigger covenants that we have with some lenders. On the road show we went on record to state that Eskom is not going to encourage any bondholders to convert to equity,” he said.
Covenants are effectively the terms of agreement between the lender and the debtor, and a breach of these conditions can lead to the lender demanding immediate payback of the loan.
Mabuza said that covenants could be breached through a debt exchange as it would result in lenders effectively being asked to take a haircut. “To ask a bondholder to forgo a coupon [interest] in lieu of a dividend from a company making losses would be asking a creditor to compromise,” Mabuza said.
Bond market analysts have also warned that credit ratings agencies would view a debt exchange as a default, warning that there is no clear way to do it without affecting both Eskom’s and the sovereign’s rating.
Eskom has been hit by numerous ratings downgrades over the past five years and is now deep in noninvestment territory, with the three main agencies rating it between three and seven notches into junk.
As Eskom is still in the midst of a capital expansion programme — the construction of coal power stations Medupi and Kusile — it has little choice but to take on new debt as well. Its capital expansion programme requires R57bn in new debt to be raised for the 2018-19 year, with CEO Phakamani Hadebe confirming to the committee on Tuesday that 72% of this has been secured.
However, the company is unable to service its debt from operating revenue, a key reason why it was not able to achieve going-concern status — the ability to continue operating and meet obligations for the foreseeable future — at the close of the past financial year.
Head of the board’s audit committee Sindi Mabaso- Koyana, who also briefed the committee, said “the going-concern status remains tight”.
“We are unable to finance our finance costs. This means we really have to unpack our operating model going forward, looking at reducing costs and increasing revenue.”
The wage agreement reached earlier in August, which commits Eskom to a 7.5% wage increase for the first year and 7% in the next two years, as well as a R10,000 once-off bonus to all employees, will put Eskom under further strain.
Mabuza said although it was higher than inflation, it was an agreement he could live with.
“Our only dispute with labour remains that we cannot agree not to discipline people who have broken the law.
“Attacks on the industrial equipment have to be dealt with through the full might of the law.”
The publication of the Integrated Resource Plan (IRP) — government’s long-term energy plan — on Monday made it clear that Eskom will be retiring all of its old coal power stations over the next 12 years.
Mabuza said that as renewable energy had been identified by the plan as the technology that the government would favour in the future when commissioning new capacity, Eskom would also like to enter that space.