Eskom needs R250bn to avert junk rating

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Johannesburg - South Africa must find 250 billion rand 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.

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

The company is rated BBB-, the lowest investment grade, by Standard & Poor’s with a 50 percent chance of being downgraded by mid-September.

“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 225 billion rand for the five years to 2018 and has been forced to implement managed blackouts this year as it struggled to keep the lights on after a decade of underinvestment in power plants.

A downgrade to junk would significantly raise borrowing costs for Eskom, the country’s biggest seller of corporate bonds with about 255 billion rand 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.

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

The government currently has a provision to back 350 billion rand of Eskom debt, of which Eskom 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, director of infrastructure ratings at S&P, said June 24, referring to the guarantees.

“The total debt could exceed 350 billion rand.”

The government needs 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.

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

“Government would not want to privatise Eskom because government must have access to the economy, how it directs the economy to fulfill developmental goals,” she said.

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

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