Higher rates, more debt for Eskom after price increase rejected

The extra funds generated would have given state-owned Eskom R20-billion to R25-billion rand of additional revenue, or about half its annual funding shortfall, according to Moody’s Investors Service. Without that money, an increase in long-term borrowing is inevitable.

“The big funding gap is still there and may get worse,” said Elena Ilkova, a Johannesburg-based analyst at Rand Merchant Bank, the investment-banking unit of FirstRand Ltd. “Eskom has been successful in switching to longer-dated bonds and now will have to accelerate this.”

Additional borrowing comes at a cost. Yields on Eskom’s $1.75-billion of bonds due January 2021 rose 21 basis points to 6.09% Monday, after the National Energy Regulator of South Africa (Nersa) rejected the company’s request for higher prices. They’ve climbed a further six basis points since. The yield on dollar debt of emerging-market utilities was little changed, JPMorgan Chase & Co. indexes show.

Eskom has a R225-billion funding shortfall for the five years through 2018 as it battles to supply adequate power in Africa’s most industrialised economy. The utility has imposed rolling power cuts almost every second day this year.

Borrowing plans
After Nersa denied the utility’s request, Eskom may be forced to seek more funds from investors. The utility would have to raise more debt should it not get permission to increase prices, Business Day newspaper reported Monday, citing Public Enterprises Minister Lynne Brown. The decision won’t have any immediate effect on the company’s borrowing plans, spokesman Khulu Phasiwe said by phone.

Eskom plans to raise R55-billion of debt in the year through March 2016 and will get a R23-billion cash injection from government this year, he said.

The first portion of the payout was to have been ready by the end of June, financed by asset sales. Details on the sales will be made this week, National Treasury spokesperson Phumza Macanda said by phone.

As part of the bailout, the state will convert a R60-billion loan into equity. That will lower Eskom’s gearing ratio, a measure of long-term debt to equity, to 69% from 75%, Phasiwe said.

Gearing improvement
“When the gearing is improved it will enable us to go to the market to borrow more money at much better rates,” he said.

The utility has R195-billion rand of bonds and R82.8-billion rand of loans outstanding, excluding interest, according to data compiled by Bloomberg. About R5-billion of bonds mature this year, and no more than R40-million is due in 2016 and 2017.

Eskom, which has already been granted a 13% price increase this year, asked Nersa for an additional 12 percentage points, saying the money was needed to supply enough power while it repairs its aging fleet of plants and builds new ones. South Africa’s inflation rate was 4.6% in May.

While Nersa rejected Eskom’s request because it said it was incomplete, it said the utility could make a full new application. The regulator “has not closed the door on Eskom,” chairperson Jacob Modise said Monday.

“There’s no doubt that future increases will come through, it’s just that the timing has now been pushed out to April next year,” Ilkova said. 

Vodacom shares
According to Fin24, government sold its 13.91% stake in Vodacom to the Public Investment Corporation to help fund the R23-billion allocation to Eskom, National Treasury said in a statement on Wednesday.

The National Treasury and the Department of Telecommunications and Postal Services worked together in executing the transaction.

“As previously indicated, the proceeds from the sale will be used to finance the R23-billion allocation to Eskom. This gives expression to the commitment made in the 2015 Budget and the 2014 Medium Term Budget Policy Statement that funding of state owned companies would be in a deficit neutral manner,” Treasury said. – Bloomberg, with assistance from Rene Vollgraaff in Johannesburg.


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