SA races to get funds for Eskom

150711. Sunset in Crownmines, Johannesburg. The picture can be used for Eskom energy supply crisis. Picture: Dumisani Sibeko

150711. Sunset in Crownmines, Johannesburg. The picture can be used for Eskom energy supply crisis. Picture: Dumisani Sibeko

Published Aug 8, 2014

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South Africa must find R250 billion of support for Eskom within weeks to prevent the power producer from being cut to junk and dragging down the country’s credit rating, a minister said yesterday.

The government was considering injecting capital and providing convertible loans to the state-owned utility, Public Enterprises Minister Lynne Brown told reporters yesterday in Johannesburg.

The group is rated BBB-, the lowest investment grade, by Standard & Poor’s (S&P) with a 50 percent chance of being downgraded by next month.

“We are looking at how to get Eskom out of its trouble because it has a short time to prove it is on a good footing to credit agencies,” Brown said.

“The main thing is to prevent a downgrade on Eskom from the credit agencies and the country as a whole from getting downgraded.”

Eskom, which provides 95 percent of South Africa’s electricity, has a funding deficit of R225bn for the five years to 2018 and has been forced to implement managed blackouts this year as it struggles to keep the lights on after a decade of under-investment in power plants.

A downgrade to junk would significantly raise borrowing costs for Eskom, the country’s biggest seller of corporate bonds with about R255bn of debt outstanding.

South Africa’s energy regulator last week approved a tariff increase that could amount to 5 percentage points on top of the 8 percent previously agreed. Prices may have to rise further for Eskom to plug its funding gap.

State guarantees

In addition to capital injections and convertible loans, the government “is looking into guarantees that we could give Eskom”, Brown said.

The government has a provision to back R350bn of the utility’s debt, of which the company has used a third.

“With costs escalating and the government being downgraded, we don’t deem that to be full support in all circumstances anymore,” Mark Davidson, the director of infrastructure ratings at S&P, said on June 24, referring to the guarantees. “The total debt could exceed R350bn.”

The government needed to demonstrate “more support” to the company to minimise the chance of a downgrade, Davidson said. South Africa’s long-term foreign currency debt is rated at the same level as Eskom debt by S&P.

“Government is still engaged in trying to find a way of addressing Eskom’s financial position and its sustainability,” Finance Minister Nhlanhla Nene told reporters in Pretoria yesterday.

“We will come to the public once we have got to that point and the cabinet will actually announce the necessary interventions.”

Selling Eskom to resolve its funding needs had been ruled out as an option, said Brown.

“Government would not want to privatise Eskom because government must have access to the economy, how it directs the economy to fulfil developmental goals,” the public enterprises minister added.

“It’s not government policy to privatise at this stage.” – Bloomberg

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