Rothschild hired by Eskom creditors to help steer debt plan

As SA’s struggling power utility prepares a long-awaited reorganisation aimed at returning it to profit and lightening its debt load.
Image: Waldo Swiegers/Bloomberg

Eskom’s creditors started working with financial advisory firm Rothschild & Co. as South Africa’s struggling power utility prepares a long-awaited reorganisation aimed at returning it to profit and lightening its debt load.

Bondholders are forming a common front to protect their interests as the state-owned company takes steps to split into three entities, according to people familiar with the matter who asked not to be identified because the information is private. While Eskom’s R392 billion ($25.4 billion) of debt will remain under the holding company for now, some bondholders fear it may be distributed across financially weaker units, they said.

Saving Eskom is a massive undertaking, with South Africa’s economy at stake as it struggles to supply uninterrupted electricity. President Cyril Ramaphosa first announced a turnaround plan in 2019, though progress has been slow as the details are debated, especially around the debt pile, which Eskom wants the government to help cut in half.

The company needs the consent of some creditors before completing the spinoff of its transmission unit, and said in a presentation published last month it would consult with others before moving ahead. The utility said it “believes that the unbundling of the transmission unit business to the National Transmission Co. of South Africa will not negatively affect Eskom’s existing debt facilities.”

Revenue streams

But creditors are concerned that revenue streams and earnings may be affected, eroding the company’s ability to service and repay the loans. Unsecured creditors may be those with the most to lose, as they would have recourse to a smaller portion of Eskom’s assets, the people said. About 74% of Eskom’s debt is guaranteed by the government.

Yields on the company’s 2028 Eurobonds without government guarantees climbed 16 basis points on Tuesday to 5.45%, the highest since March. The premium investors demand to hold the unsecured debt rather than bonds guaranteed by the government has widened in recent weeks, suggesting some investor anxiety.

A spokesperson for Rothschild declined to comment. Eskom wasn’t immediately able to comment.

Eskom has begun the legal separation of its transmission unit, designed to help open the grid to private suppliers and allay electricity shortages that have curbed economic growth. As part of the reorganisation, a significant portion of the debt is to be housed in the generation unit, whose program to build new capacity resulted in defective, over-budget, coal-fired plants yet to be completed.

The split of that business along with the distribution arm is expected to start later this year. The company said last month it will engage with creditors to gather their feedback on future unbundling steps. It is working with Lazard Ltd. as financial adviser and the legal firm White & Case LLP on its restructuring plan.

Eskom has also warned that it needs the debt to be resolved in order to accept $8.5 billion in grants and loans from wealthy nations — made at the COP26 climate summit– to help South Africa move away from coal.

The unbundling of the three operational units would give the government a better idea of the valuations of those entities, after which it would decide how to distribute the debt and deal with any remaining amount, Public Enterprises Minister Pravin Gordhan said in an interview in November.

Finance Minister Enoch Godongwana would have to decide whether the government assumes part of Eskom’s debt by the time of the budget in February, giving consideration to the serious fiscal constraints the country is facing, Gordhan said.

© 2022 Bloomberg

COMMENTS   1

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Eskom could save itself a bundle in fees. It is obvious:

People lent it too much for what would be prudent in the widely known circumstances since 2010. Only an idiot lender was not aware of the allegations around circus scale corruption. Accept a haircut in other words.

It is nonsense that debts with state guarantee cost more than state debt. Get ready for rate reset in other words.

Total debt is absurd, 250b needs to move away from electricity consumers, Expect a repackaging deal.

debt holders need to realize that the movie doesn’t always play out the way the deck was stacked. Risk priced loans carry risk. That risk has now arrived.

The entire package must take a haircut and be repriced.

End of comments.

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