Eskom creditors may yet share South Africa’s pain

Date: Dec 18, 2018

With its mix of communists, trade unionists and liberation fighters, South Africa’s ruling African National Congress is an unlikely backer of bondholders’ over workers’ rights. Yet the plans to lift state electricity giant Eskom out of a 419 billion rand ($30 billion) debt hole imply just that.

Eskom has four potential levers to get out of the hole. It can ask for more money from the government, beg the regulator to hike prices, cut jobs, or restructure its own debt. The group appears to be considering the first three.

The first part of the plan is a sort of backdoor bailout. Eskom wants to shift 105 billion rand of debt to the state. That might chop perhaps a quarter off its annual interest bill, or about 9 billion rand – if the heavily-indebted government agrees.

The other two legs look harder. Eskom wants to hike electricity prices, and cut 16,000 jobs. Assume a 7.5 percent tariff hike, and Eskom could boost annual revenue by 15 billion rand, while the reported job cuts imply savings of perhaps 11 billion rand. Chalk it all up, and Eskom could save 35 billion rand a year. That would nearly cover the shortfall between cash from operating activities and debt service costs, based on first half figures.

All three proposals face challenges. Unions will object to large scale firings, and the population will resist tariff increases. Meanwhile, President Cyril Ramaphosa on Dec. 13 rejected the debt swap idea, suggesting a bailout is off the table. That makes it more likely that private bondholders will contribute, particularly holders of 150 billion rand of debt lacking a sovereign guarantee.

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