The National Treasury is considering whether it would be better to move a chunk of Eskom’s R464bn of debt into a special-purpose vehicle (SPV) or have the state take over responsibility for it directly, people familiar with the situation have said.

While banks have led discussions for the past few weeks over the creation of an SPV that would take over at least R100bn of Eskom’s debt, and possibly much more, that debt would almost certainly have to be guaranteed by the government, the three people said, asking not to be identified because an announcement hasn’t been made.

Under the SPV arrangement, the debt Eskom retains and any new debt it contracts would be paid off first as a priority, while that held in the SPV, which could have tenure of 10 years or more, would be last in line and would thus likely need to be guaranteed by the state to win investor support, they said, adding this is something the Treasury will need to decide on.

While either option would strengthen Eskom’s balance sheet, both risk imperiling SA’s credit ratings by further boosting public debt, seen climbing close to 90% of GDP by 2026 even without adding the utility’s liabilities. That makes the stance of major rating companies on any Eskom debt deal a factor in the government’s deliberations, the people said.

Moody’s Investors Service already considers Eskom debt guaranteed by the government as sovereign debt.

The creation of the SPV is just “a complicated way of getting to the same result as moving it onto the sovereign [debt]”, said Jones Gondo, a senior credit analyst at Nedbank.

Eskom, described by Goldman Sachs Group as the biggest threat to the SA economy, has become mired in debt as a result of overspending on projects. The utility can’t meet its costs and the country is experience continued load-shedding and power outages due to inadequate maintenance at its ageing fleet of coal-fired power plants.

If swapping Eskom debt for debt issued by the SPV were deemed voluntary, it wouldn’t be regarded as an involuntary change in control, which would trigger a default. The SPV may be managed by the Public Investment Corporation, which is Africa’s biggest fund manager.

Eskom is not considering any default on its outstanding debt and remains in “constant discussions with the relevant stakeholders” to find a sustainable balance-sheet solution, the utility said in response to questions. The Treasury directed inquiries to Eskom.

Yields on the utility’s unsecured 2028 dollar bonds have climbed 52 basis points (bps) in March to 6.89%, widening the spread over similar-maturity sovereign debt by about 64bps to 244.

“Ultimately, there is only one option and we are homing in on that: the sovereign taking the risk,” said Peter Attard Montalto, the London-based head of capital-markets research at Intellidex UK. “All the structures, and so on, are by the by.”



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