By Joanna Fic
On 22 February 2023, South Africa's Minister of Finance announced details of a debt relief for Eskom Holdings SOC Limited (Caa1 positive).
This follows the October 2022 announcement that the government would take over between one-third to two-thirds of Eskom's debt.
The proposed debt relief arrangement will amount to R254 billion, comprising R168 billion in Eskom's debt and R86 billion in interest payments over the next three years. These amounts compare to Eskom's outstanding debt of R423 billion. The debt relief will thus reduce the company's debt by around 40% by the end of March 2026, but the cash flow benefit will be greater given the coverage of all the interest payments in the period.
The debt relief is credit positive for Eskom as it will strengthen the balance sheet and reduce pressure on cash flows, allowing the company to focus on investments and maintenance of the existing assets. It will also substantially reduce the non-payment risk on Eskom's debt over the next three years. The terms and conditions of the advances from government are,
Under the proposed debt relief arrangement, Eskom will receive advances from the government in each of the next three financial years as follows:
- 2023/24 — R78 billion, which compares with Eskom's scheduled debt principal and interest payments of R79 billion, with the R1 billion differences to be funded by the company through efficiencies,
- 2024/25 — R66 billion to cover all of Eskom's scheduled debt principal and interest payments,
- 2025/26 — R40 billion to cover all of Eskom's scheduled debt principal and interest payments; the government will in addition take over up to R70 billion in Eskom's debt.
The advances will, according to the government announcement, come in the form of subordinated loans, which will convert to equity subject to certain conditions. These include the following:
- Eskom's capital expenditure is restricted to transmission and distribution networks, with the only investments in the power generation relating to minimum emissions standards, flue-gas desulfirasation and required maintenance.
- Eskom may not use proceeds from the sale of non-core assets for capital and operating needs.
- Eskom will not raise any new borrowings from 1 April 2023 until the end of the debt-relief period, unless permitted by the Minister of Finance.
- Eskom's guarantee framework agreement of R350 billion will reduce in line with National Treasury recommendations.
- Positive equity balances in Eskom's derivative contracts cannot be used to structure new debt or loan agreements without the National Treasury's approval.
- The debt relief can only be used to settle debt and interest payments.
- Eskom may not implement remuneration adjustments that negatively affect its overall financial position and sustainability.
Failure by Eskom to achieve and/or adhere to specific conditions in any quarter will require a repayment of the loan amount from that quarter to the National Revenue Fund with interest subsequently accruing at market rates. Eskom will have, however, an opportunity to cure any such failure during the following quarter.
While the loans from the government will be subordinated to Eskom's existing debt, details of their terms and the accounting treatment are yet to be confirmed. Furthermore, it is not clear which debt will be taken over by the National Treasury in the financial year to March 2026 and any such process will likely require consent from creditors. We estimate that Eskom's unguaranteed debt that matures post March 2026 amounts to close to R60 billion.
The National Treasury recognises that the debt relief cannot of itself address Eskom's complex and multiple issues. Specifically, the proposed arrangement considers that tariff increases of 18.65% in FY 2024 and 12.74% in FY 2025 are necessary to make the debt relief sustainable. Furthermore, the National Treasury said that it was working on a proposal to address the outstanding municipalities debt, which stood at R56.3 billion as of end-December 2022.
The key elements of the proposal include a conditional debt write-off but also legal and regulatory changes to help Eskom resolve the issues of non-payment. Other measures include installation of prepaid meters and national government initiatives to improve municipal revenue management. A National Treasury circular including the proposal will be published by the end of March 2023.
Joanna Fic is the Senior Vice President at Moody’s
BUSINESS REPORT