HILARY JOFFE: Treasury response awaited on Transnet, Eskom and bonds

There are three big questions for which the bond market will be looking to next week’s budget for answers. What the Treasury says about Transnet, Eskom, and new issuance will shape the market’s response.

Regarding Transnet, some fund managers seem to have talked themselves into a big bailout, along the lines of the Eskom debt relief package the Treasury agreed on two years ago. The ANC has been pushing for one. All indications are that there is no such bailout. Not only has the Treasury been firmly against this, but Transnet CEO Michelle Phillips isn’t even asking for one. She told a Mining Indaba panel last week she didn’t want any more debt.

Which is not to say there will be nothing in next week’s budget about Transnet. There could well be quite a lot. But it is likely to be in the form of a “creative solution” to the problem of how to fund Transnet to repair and upgrade its railway network to the standard needed to bring in private train operators, as well as to fix its Cape Town container port (where Transnet seems to have no intention of bringing in a private operator).

Transnet itself has already gone public on the beginnings of such a solution, which will involve financing for specific projects, under specific conditions. It has already started applying to the Treasury’s upgraded budget facility for infrastructure for project based loans. The medium-term budget listed the Cape Town container terminal expansion and Transnet’s Ukuvuselela automotive rail corridor upgrade among the projects approved for execution using the facility’s new bid windows. Phillips has mentioned further applications. She has also talked about co-funding from Transnet’s big customers, particularly on its iron-ore and coal lines, perhaps using a special purpose vehicle.

All of this might be fed into the package the Treasury could announce for Transnet. This could include government putting a small slice of equity — say R5bn a year — into some sort of blended finance vehicle for a project, or parcel of projects.

It could issue new infrastructure bonds to raise the money — the medium-term budget talks of new financing mechanisms to support infrastructure investment as a stand-alone asset class. The idea might be the equity would be used to leverage commercial funding and long-term, low-cost financing from development finance institutions such as the Development Bank or African Development Bank. And it could be dressed up as part of the government’s new big focus on infrastructure financing — not a bailout.

Some fund managers will still worry about Transnet’s ailing balance sheet, with the R136bn debt its still-weak operations and cash flow can’t support. Others will be thrilled if the Treasury stands firm.

“It’s an awful idea to guarantee debt or do another equity injection — all we would be doing is another Eskom,” said Matrix Fund Managers’ Kim Silberman. “If they get a bailout they won’t be forced to go to the private sector as they should, and they won’t make tough decisions.”

Arguably the government and Transnet still won’t be making the really tough decisions that could sort out the debt problem — that is, decisions to sell Transnet’s good assets, not just the bad ones, as a private company would have to do if it had the balance sheet Transnet has. The Durban container port deal with the Filipino operators would have brought in R12bn, if it hadn’t run aground in the courts. Cape Town could bring in further billions. So too could concessioning out the profitable iron ore and coal lines, not just the unprofitable Durban-Joburg corridor.

SA certainly can’t afford another SOE that becomes endlessly dependent on cash transfers. Disturbingly, Eskom’s debt of R401bn is hardly lower than the R423bn at which it stood in February 2023, when the government agreed a three year, R254bn debt relief arrangement with the power utility. That raises the question whether the arrangement really will end after three years.

But the more immediate question for the bond market relates to the R70bn of Eskom debt the government undertook to “take over directly” in the third year of the arrangement. Nobody knows how this will be done, which of Eskom’s loans will be taken over, and whether they will simply be exchanged for sovereign (government) bonds. RMB Morgan Stanley believes the Treasury will spread it equally over two fiscal years, redeeming Eskom debt as it falls due.

Ninety One portfolio manager Adam Furlan said the market would prefer a “like for like” switch of Eskom bonds into government bonds of similar maturity, which wouldn’t be thought of as an increase of supply to the bond market. The difficulty is the yields on Eskom bonds, perceived as more risky, are 40-50 basis points above SA government bonds — so Furlan said the Treasury would have to make good on that to entice an Eskom bondholder to switch.

Finally is the budget question that’s always paramount for the market: how much in the way of new bonds does the Treasury plan to issue in the year ahead? There is, as always, much debate about whether it will deliver on its deficit and debt projections (of which more in my budget preview next week) and stick to the borrowing numbers it projected in the medium-term budget. What has changed markedly for SA in the past year is the long-term rate at which it borrows on the market, which has benefited hugely from the government of national unity boost to confidence.

While US and European 10-year bond yields have jumped because of their governments’ perceived riskiness, SA’s 10-year yields are still comfortably below where they were a year ago. That could help contain the cost of the public debt, but it won’t change that just like Transnet and Eskom, the government has more debt than it can afford. And with the world and global markets as volatile and scary as they are now, that makes SA more vulnerable than before to shifts in sentiment. Markets will look to the budget for credible answers on what the government plans to do about it.

• Joffe is editor-at-large.