By negotiating forward cover, Eskom’s foreign loans cost it nothing, but they do cost the taxpayer, reports Simon Segal
Eskom’s second samurai bond, a R550-million five-year issue, is expected to reflect an improved credit rating for Eskom and, by implication, South African borrowers in general.
The loan is expected to be priced at 50 to 60 points above the five-year Japanese Libor rate. For the same loan raised last October, Eskom paid a 98 point premium. The loan also comes soon before government is expected to raise its first foreign loan to finance this year’s budget deficit.
In last week’s budget, Finance Minister Chris Liebenberg budgeted to raise R2,5-billion in foreign loans (R1,8-billion in 1995/96) out of a total gross borrowing requirement for 1996/97 of R45,1-billion. The rest will be financed from short-term loans (R3-billion) and government bonds (R36,6-billion).
This will be the government of national unity’s fourth foreign loan. Last June, the government raised Y30-billion in a Japanese samurai bond at 5%. In December 1994, $750- million was raised at 9,7%, then 193 basis points above the equivalent United States Treasury rate.
In January, it raised a 10-year Eurosterling bond at 9,38%, 190 points above the equivalent British benchmark bond. This was government’s first 10-year loan.
Raising R2,5-billion should not prove a problem, but will probably be done in two or three tranches. The first tranche is expected when R16-billion in bonds matures over the next two months. Government will most probably raise the money in Europe (Germany and Switzerland), an untapped source.
Foreign borrowing becomes expensive when the rand depreciates. The 100-million bond now costs R610-million to redeem, against R580- million when it was first issued earlier this year.
As for Eskom, its 1996 borrowing requirements have been raised to R3-billion from its budgeted R2,3-billion. Of this Eskom will raise R1,2-billion offshore. Eskom expects to borrow R3-billion annually over the next few years.
Unlike government, which cannot hedge itself, Eskom, by negotiating forward cover, borrows offshore at exactly the same rate as it borrows locally. Foreign borrowings thus cost Eskom nothing, but could cost the Reserve Bank, hence the taxpayer.
Eskom sees three main advantages in offshore borrowing:
l It does not have to be a market-maker in its bonds as it does with local bonds.
l It earns name recognition.
l The borrowings have no impact on the local capital markets.
As for government, which is at risk from exchange-rate depreciation, it is not simply the numbers that determine whether government should raise offshore money. Government’s priority in going offshore is to test the market and establish a presence and benchmark for South African corporate borrowers.
Some economists are sceptical about this argument. The criticism is that any foreign loan that doesn’t augment South Africa’s export capacity to service the loan should not be undertaken. At present, government loans augment reserves without boosting the economy’s export capacity.
Stockbroker Frankel Pollack calculates that international bond issues under the new government total R6,6-billion. Over the life of South Africa’s new government, it calculates that 26 foreign loans issued by South African financial institutions and private placements have raised a total R3- billion.
Raising money offshore is becoming less attractive with interest rates in South Africa falling and the Reserve Bank increasing the effective cost of forward cover as it withdraws from the forward market.