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Eskom’s quickest fix is giving it cash now, swapping debt later – Nedbank CEO

SOE is buckling under a debt burden of more than R440bn.

Ask Nedbank Group chief executive officer Mike Brown how to save South Africa’s beleaguered state-owned power utility and his approach is simple: first give it cash and then consider a debt-to-equity swap later.

Eskom is paying so much in interest on its debt — at the same time that its income is falling — that the company is struggling to keep the country’s lights on. To ease the firm’s cash-flow woes, the government is planning a R230 billion bailout. While the state initially wanted to spread that over 10 years, a significant portion is now being expedited, with details expected from National Treasury on July 23.

Read: Eskom gets rescue option as PIC proposes debt-equity swap

“For all practical purposes, we don’t have any easy or good options available at this stage.” Brown said in an interview in Durban on South Africa’s east coast on Friday. Bringing forward the bailout package or increasing the amount “is the most practical short-term solution.”

Other suggestions are being considered to ease Eskom from the burden of more than R440 billion of debt, 70% of which is guaranteed by the state. One includes a proposal to convert debt held in Eskom on behalf of over 1 million state workers into equity, as reported by Bloomberg on July 11. Another is said to include shutting coal-fired plants early to get cheaper financing and to make way for renewable energy.

Green energy is a “possible alternative but incredibly complicated to implement and likely to take three to five years to get up and running,” Brown said. “Eskom has a six-month problem.”

‘Board fights’

While “some form of switch where Eskom bondholders would be able to switch Eskom bonds for government bonds” presents a potential answer, it is also complex and would take longer to get done than releasing the bailout funding through the special appropriations bill, the CEO said.

The Public Investment Corporation, which manages about $150 billion mainly in civil servants’ pensions, might take a hit should the Eskom’s debt it holds be converted to shares, said Richard Segal, a London-based senior emerging-markets analyst at Manulife Asset Management.

“The equity value would likely be lower than the debt value,” he said. “This might not sit well” with trustees of the retirement funds.

It could lead to some positive changes at Eskom if PIC gains board representation and some management control, Segal said, “although it could also lead to board fights, which make the situation worse.”

Eskom would need to be completely reorganized for a debt-to-equity switch to happen, which could still be years away, said Darias Jonker, a London-based director at consultant Eurasia Group Ltd., especially considering labor organisations are completely opposed to any reconfiguration at Eskom. A World Bank study in 2016 found the company needs to cut 66% of its workforce.

“There will not be a definitive deal to make the debt sustainable, in other words, debt that can be wholly serviced from Eskom’s revenue in the next 12-24 months,” he said. Even the “enhanced bailout” scheduled to be detailed in coming weeks, “will not be enough to make the debt sustainable.”

While Nedbank’s Brown is optimistic, the government will have to make hard decisions, with the burden ultimately falling on the South African public to shoulder the bill.

“Eskom can be saved but I don’t believe a Eskom in its current model is appropriate for South Africa into the future,” he said. “It will be about the business model on the one hand and paying the price for Eskom’s debt levels. Taxpayers are the only place Eskom will go to for funding over time.”

© 2019 Bloomberg L.P.

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My Dear Mike – You miss something here – these guys have been given “cash now” for the past 10 years !!!! and nothing has changed!!! The socialists cannot run SOE’s on their own – not even one

Eskom is a bottomless pit for money- Privatize now or be doomed for ever!!!!

The quickest fix is actually writing off PIC owned Eskom debt.

It’s government owned so let government pensioners foot the bill. In total it’s just 4% of the PIC total pension portfolio. That’s a digestible haircut. That alone will take Eskom debt from R440bil to R350bil.

Then force Eksom only to borrow from the PIC. PIC & government will have to enforce accountability otherwise their pensions go up in smoke. You make your bed, you have to lie in it.

No taxpayers should be harmed in the process.

Eskom’s quickest fix is getting rid of dead wood now

is there an easy link to what Eskom’s debts are and each tranche’s interest rate?

First thing has to be for government to buy up all debt with a higher interest cost than our sovereign bonds. Why pay a bankers and lenders 11% on Eskom debt when sovereign is 8% and eskom debt is anyway government guaranteed? Those holders are getting 3-11 or almost 30% more income than they deserve for what is effectively the same risk.

Ah Mr Buys, methinks you have found the reason why Mr Brown supports a “debt swap”. He sees desperate Eskom and the ANC gravy train willing to up interest rates provided someone will keep lending/giving them money. He sees that combing Eskom and SA debt is an opportunity for higher rates to be charged. Of course if no efficiencies are made to Eskom, the whole pack of cards will come apart but, like all pyramid scheme “investors”, Brown thinks he will either be gone with a fat bonus or out by then.

If only people would do the right thing, rather than the convenient thing. Greed.

Why doesn’t Browne look into history when Nedbank supported Triomf many years back and we had a debt stand- still, we are on the cusp of entering a similar financial market once again. Both resulted also in a change of government – we can only hope of course

Remove the commie anc’s need to centrally control everything and privatise!

the ANC government has become SA’s largest employment agency – the cost of vote buying is starting to bite – HARD.

You do not fix a leaky bucket by adding in more water. And who in his right mind would accept a broken bucket as payment for debt?

LOL! You might find a banker, who has an “interest” in a business which makes and sells buckets with holes them, and also another one selling water!

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