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Eskom gets rescue option as PIC proposes debt-equity swap

In exchange for representation on Eskom’s board.

A proposal by the biggest owner of Eskom’s debt to convert its $6.4 billion holding into equity has become a rescue option as South Africa seeks to restructure the troubled power utility.

In return, the Public Investment Corp., which manages about $150 billion and is responsible for the pensions of more than 1 million state workers, wants a say over Eskom’s messy finances, including board representation, said five people with direct knowledge of the talks. They asked not to be identified because the discussions over the past two years haven’t been made public. The rand and government bonds gained.

Daniel Matjila, former head of the PIC, evoked a debt-to-equity swap in testimony Thursday before a judicial inquiry into whether the fund was adequately safeguarding pension assets. The PIC holds 20% of all of Eskom’s outstanding bonds.

Read: PIC’s Matjila discusses Eskom debt-for-equity swap: PIC update

“When you do that, you even give the balance sheet of Eskom a bigger room to manoeuvre,” he said. “But then it requires even more involvement in the governance structures.”

While the proposals have been discussed over the last 18 months to two years, they have risen in importance since President Cyril Ramaphosa said in a national speech on February 8 that Eskom would be split into generation, transmission and distribution entities, two of the people said. Matjila said he spoke to Eskom’s management about the option in early 2018.

Biggest problem

With more than R440 billion ($32 billion) in debt, about 70% of it guaranteed by the government, Eskom is Ramaphosa’s biggest problem. The monopoly utility can’t sell enough power to cover its costs, needs to cut 66% of its work force and hasn’t properly maintained its ageing coal plants. Labour unions, key allies of the president, oppose the restructuring plans and the job cuts that management says are necessary.

Read: Significant risks for SA’s economic outlook – Treasury

The rand gained to its strongest level against the dollar since February. Yields on the government generic 10-year bonds dropped five basis points to 8.63% immediately after the report.

If the proposal is implemented, the PIC would likely get shares in the transmission unit, which is seen as a stable part of the business, another person with knowledge of the talks said. Giving the PIC equity in the healthiest unit might not sit well with other bondholders.

Legal headaches

Transmission “will be the most well run and profitable entity,” said Peter Attard Montalto, head of capital markets research for Intellidex, a business-research firm. “Preferable treatment over other bondholders would create huge legal headaches for government.”

Work on the proposal within the PIC has slowed because of the ongoing commission of inquiry into governance at the fund manager, ordered by Ramaphosa, one of the people said. Its implementation would also be opposed by some of the unions whose members pensions it manages.

The PIC, which gets almost 90% of its money from the Government Employees Pension Fund (GEPF), has drawn criticism from the Public Servants Association, the biggest union representing government workers, for the amount of Eskom bonds it holds. The PSA has said the PIC should stop buying the company’s debt and should begin selling down its holdings. The union argues that pensioners’ money should not be used to prop up struggling state companies that have been beset by corruption scandals, including Eskom.

“We believe Eskom is nuclear waste,” said Tahir Maepa, the PSA’s deputy general manager for members’ affairs. “The state should take over their mess.”

In February last year the PIC lent Eskom R5 billion for a month to help it out of a liquidity crisis. Matjila said the swap discussions with Eskom were around the that time. Also at the time, the PSA demanded proof that the loan was not a violation of the PIC’s mandate.

The GEPF, which says it holds R87.6 billion of Eskom bonds through the PIC, said it hasn’t been approached about the conversion of Eskom bonds into equity. The PIC also holds some Eskom bonds on behalf of its other clients. The National Treasury, which oversees the PIC, referred questions to the fund manager.

The media teams of Eskom and the PIC acknowledged receipt of a request for comment and said a response was being worked on. Repeated requests for comment didn’t draw a response.

While the PIC has accumulated Eskom bonds, including through a R20 billion private placement, many other fund managers, such as Granate Asset Management, have sold their holdings as the utilities’ finances deteriorated.

One senior banker said the debt-to-equity plan could be legally challenged by other debt holders and questioned whether the PIC would have the requisite expertise to sit on Eskom’s board. The PIC has said in various iterations of the proposals that in addition to board representation it could seek seats on key committees such as procurement, a voice in possible asset sales and an eventual exit strategy, possibly including a listing.

Still, a money manager who holds the debt of a number of South African state-owned companies, including Eskom, said while all bond holders should be offered the same terms, a swap would improve the health of Eskom and could therefore be seen as positive. Both asked not to be identified because the matter is sensitive.

In August last year, Jabu Mabuza, Eskom’s chairman, told parliament the utility dropped plans to ask the PIC to convert some of its debt into equity because it might trigger covenants with some other lenders.

© 2019 Bloomberg L.P.

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Some may wrap the issue in cotton and describe it as a “debt-equity swap”. Others may be more straightforward and call it a donation. Others may even say that the implosion of SOE-debt created a black hole with such a strong gravitational force that it swallows all the capital that comes into contact with it.

All these descriptions have the same outcome, the black hole always wins in the end.

No growth for state pension funds for the last few years and for the future, another plan for just another unsolvable problem, changing the management will not rescue a company in financial trouble.

Eskom theme sung at all board meetings. The PIC already knows the tune:

Clowns to the left of me,
Jokers to the right, here I am,
Stuck in the middle with you.

Yes I’m stuck in the middle with you,
And I’m wondering what it is I should do,
It’s so hard to keep this smile from my face,
Losing control, yeah, I’m all over the place,
Clowns to the left of me, jokers to the right,
Here I am, stuck in the middle with you.

by Steelers Wheel originally before Eskom gatecrashed it..

That is no debt swap! That is converting debt( that pays interest-we hope) to worthless equity with pensioners money!

In the absence of an operational turnaround( more electricity sold and paid for by the consumers and less costs i.e. staff and stealing) the equity is worthless!

And this with pensioners money!

As long as it’s government workers pensions got a bunch of lemon bonds exchanged for a pile of dung equities in a broke company, it should be fine.

And taxpayers now don’t need to fork out bond interest payments to these pensions so looks like a win.

This is a victory or am I reading this wrong.

Debt: Stand in front of the queue for interest payments.
Equity: Stand at the back of the queue for a share of future free cash flows.

Guess which of the two is more valuable right now.

Would this transaction serve the best interests of the PIC’s clients; namely pension, provident, social security and guardian funds?

This is simply a bailout by pensioners as opposed to the usual bailout by taxpayers.

But eventually the taxpayers will have to bail out the pensioners.

It’s called kicking the can down the road. Just means that our grandchildren will now be covering our childrens pensions… All govs do it, it’s all a ponzi scheme and when there is no growth the economy implodes.

Hahahahahahhaha. This is hilarious, what sane pension fund would invest that kind of money in a bankrupt company? Lol now they are just looting pensioners. Once that is finished, they will loot our bank accounts.

The PIC buys bonds in a business that cannot make a profit – seems like a poor investment.
Then, they want to convert their bond into shares so that this government institution can become a shareholder of the same government’s failed Eskom, to get board representation?? – even worse investment.
PIC does not seem able to manage its own businesss so it wants to manage a failed energy company. PIC management probably sees some lucrative board jobs at Eskom.
Unbelieveable, totally boggles my mind.

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