Nedbank CEO weighs in on Eskom
Give cash first then consider a debt-to-equity swap later, says Mike Brown
Ask Nedbank Group CEO Mike Brown how to save SA’s beleaguered state-owned power utility and his approach is simple: first give it cash and consider a debt-to-equity swap later.
Eskom Holdings is paying so much in interest on its debt at the same time that its income is falling that the company is struggling to keep the country’s lights on. To ease the firm’s cash flow woes, the government is planning a R230bn bailout. While the state initially wanted to spread that over 10 years, a significant portion is now being expedited, with details expected from the Treasury on July 23.
“For all practical purposes, we don’t have any easy or good options available at this stage,” Brown said in an interview in Durban on Friday.
Bringing forward the bailout package or increasing the amount “is the most practical short-term solution”.
Other suggestions are being considered to ease Eskom from the burden of more than R440bn of debt, 70% of which is guaranteed by the state. One includes a proposal to convert debt held in Eskom on behalf of state workers into equity. Another is said to include shutting coal-fired plants early to get cheaper financing and to make way for renewable energy.
Green energy is a “possible alternative but incredibly complicated to implement and likely to take three to five years to get running”, Brown said. “Eskom has a six-month problem.”
While “some form of switch where Eskom bondholders would be able to switch Eskom bonds for government bonds presents a potential answer, it is also complex and would take longer to get done than releasing the bailout funding through the Special Appropriations Bill, the CEO said.
The Public Investment Corporation (PIC), which manages about $150bn mainly in civil servants’ pensions, might take a hit should the Eskom debt it holds be converted to shares, said Richard Segal, a Londonbased senior emerging-markets analyst at Manulife Asset Management. “The equity value would likely be lower than the debt value,” he said. “This might not sit well” with trustees of the retirement funds.
It could lead to some positive changes at Eskom if the PIC gains board representation and some management control, Segal said, “although it could also lead to board fights, which make the situation worse”.
Eskom would need to be completely reorganised for a debt-to-equity switch to happen, which could still be years away, said Darias Jonker, a London-based director at consultant Eurasia Group, especially considering labour organisations are completely opposed to any reconfiguration at Eskom.
A World Bank study in 2016 found the company needs to cut 66% of its workforce.
“There will not be a definitive deal to make the debt sustainable, in other words, debt that can be wholly serviced from Eskom’s revenue in the next 1224 months,” he said. Even the “enhanced bailout” scheduled to be detailed in coming weeks, “will not be enough to make the debt sustainable.”
While Brown is optimistic, the government will have to make hard decisions, with the burden ultimately falling on the SA public to shoulder the bill.
“Eskom can be saved but I don’t believe Eskom in its current model is appropriate for SA into the future,” he said. “It will be about the business model on the one hand and paying the price for Eskom’s debt levels.
“Taxpayers are the only place Eskom will go to for funding over time.”