Johannesburg - Eskom Holdings will attempt to lower its borrowing costs by exploring funding options other than the international bond market after South Africa’s state-owned electricity supplier was downgraded to junk by the two biggest credit-ratings companies.
The utility’s $1.25 billion bond sold in February had a coupon of 7.125 percent, the highest of all its outstanding debt in the US currency. That’s at the “outer edge of the price boundaries that we normally borrow at,” CFO Anoj Singh said in an interview November 24. “We’ll be very discerning in terms of the funding sources we’ll be accessing,” he said.
Eskom, the nation’s biggest borrower after the government, was downgraded to junk by Moody’s Investors Service a year ago and by Standard & Poor’s in March as it struggled to generate enough money to build new power plants and electricity for the continent’s most-industrialised economy. The company needs to raise R237 billion over the next five years to increase the country’s generation capacity, a portion of which will be paid for by consumers through higher tariffs.
Yields on Eskom’s bond due in February 2025 have increased since the S&P downgrade on March 19, rising 108 basis points to 7.98 percent in Johannesburg on Wednesday. The average yield of emerging-market utilities’ dollar debt rose 49 basis points to 5.13 percent, JPMorgan Chase & Co indexes show.
The utility, which provides about 95 percent of South Africa’s power, will try to get funding from development-finance institutions, export-credit agencies, the World Bank and bilateral-loan agreements, CEO Brian Molefe told reporters in Johannesburg.
“We do not have to do a global bond issue,” he said. “I know it sounds a bit arrogant - a person ranked as junk status should be grabbing every opportunity - but we only will go to markets when the conditions are right.”
Eskom said in January it was confident the company could raise money from debt markets even though it had been cut to junk by Moody’s.
Funding options
Eskom may tap Chinese lenders, the Japanese yen market and sukuk, or Islamic finance, Molefe said.
Eskom borrowed 150 million euros ($159 million) from Agence Francaise de Developement, France’s development agency to fund electricity distribution in rural areas of South Africa, the utility said. The loan includes a five-year grace period and 20 years of capital repayment.
“It’s relatively small but a good illustration of the things that can be done with development agencies,” said Elena Ilkova, a Johannesburg-based analyst at FirstRand’s Rand Merchant Bank unit. “They are willing to lend at developmental rates rather than commercial rates, but it’s a question of size - how much can you scale this kind of borrowing.”
Debt pile
The utility’s net income for the six months ended September 30 rose 22 percent to 11.3 billion rand, it said November 24. While the company’s finances have stabilised, Eskom will continue to request higher tariffs from consumers to service its R300 billion debt pile, Singh said.
As such, it’s vital future borrowing costs are kept to a minimum, he said.
The February bond “has set the benchmark in terms of what investors believe would be an appropriate return for what they need to invest in an organisation such as this one,” Singh said. “We’ll try and come in under that number” with any new funding, he said.
BLOOMBERG