Eskom gets rescue option as PIC proposes debt-equity swap


A proposal by the biggest owner of Eskom's debt to convert its R90bn holding into equity has become a rescue option as South Africa seeks to restructure the troubled power utility.

In return, the Public Investment Corporation, which manages about R2.2trn and is responsible for the pensions of more than a million state workers, wants a say over Eskom’s messy finances, including board representation, said five people with direct knowledge of the talks.

They asked not to be identified because the discussions over the past two years haven’t been made public. 

Daniel Matjila, former head of the PIC, evoked a debt-to-equity swap in testimony Thursday before the judicial commission of inquiry into the PIC. The asset manager holds 20% of all of Eskom’s outstanding bonds.

“When you do that, you even give the balance sheet of Eskom a bigger room to maneuver,” he said. “But then it requires even more involvement in the governance structures.”

While the proposals have been discussed over the last 18 months to two years, they have risen in importance since President Cyril Ramaphosa said in February that Eskom would be split into generation, transmission and distribution entities, two of the people said. Matjila said he spoke to Eskom’s management about the option in early 2018.

Biggest Problem

With more than R440bn in debt, about 70% of it guaranteed by the government, Eskom is Ramaphosa’s biggest problem. The monopoly utility can’t sell enough power to cover its costs, needs to cut 66% of its work force and hasn’t properly maintained its aging coal plants. Labour unions, key allies of the president, oppose the restructuring plans and the job cuts that management says are necessary.

If the proposal is implemented, the PIC would likely get shares in the transmission unit, which is seen as a stable part of the business, another person with knowledge of the talks said. Giving the PIC equity in the healthiest unit might not sit well with other bondholders.

Legal Headaches

Transmission “will be the most well run and profitable entity,” said Peter Attard Montalto, head of capital markets research for Intellidex, a business-research firm. “Preferable treatment over other bondholders would create huge legal headaches for government.”

Work on the proposal within the PIC has slowed because of the ongoing commission of inquiry into governance at the fund manager, ordered by Ramaphosa, one of the people said. Its implementation would also be opposed by some of the unions whose members pensions it manages.

The PIC, which gets almost 90% of its money from the Government Employees Pension Fund (GEPF), has drawn criticism from the Public Servants Association, the biggest union representing government workers, for the amount of Eskom bonds it holds. The PSA has said the PIC should stop buying the company’s debt and should begin selling down its holdings.

The union argues that pensioners’ money should not be used to prop up struggling state companies that have been beset by corruption scandals, including Eskom.

“We believe Eskom is nuclear waste,” said Tahir Maepa, the PSA’s deputy general manager for members’ affairs. “The state should take over their mess.”

In February last year the PIC lent Eskom R5bn for a month to help it out of a liquidity crisis. Matjila said the swap discussions with Eskom were around the that time. Also at the time, the PSA demanded proof that the loan was not a violation of the PIC’s mandate.

The GEPF, which says it holds R87.6bn of Eskom bonds through the PIC, said it hasn’t been approached about the conversion of Eskom bonds into equity. The PIC also holds some Eskom bonds on behalf of its other clients. The National Treasury, which oversees the PIC, referred questions to the fund manager.

The media teams of Eskom and the PIC acknowledged receipt of a request for comment and said a response was being worked on. Repeated requests for comment didn’t draw a response.

While the PIC has accumulated Eskom bonds, including through a R20bn private placement, many other fund managers, such as Granate Asset Management, have sold their holdings as the utilities’ finances deteriorated.

One senior banker said the debt-to-equity plan could be legally challenged by other debt holders and questioned whether the PIC would have the requisite expertise to sit on Eskom’s board. The PIC has said in various iterations of the proposals that in addition to board representation it could seek seats on key committees such as procurement, a voice in possible asset sales and an eventual exit strategy, possibly including a listing.

Still, a money manager who holds the debt of a number of South African state-owned companies, including Eskom, said while all bond holders should be offered the same terms, a swap would improve the health of Eskom and could therefore be seen as positive. Both asked not to be identified because the matter is sensitive.

In August last year, Jabu Mabuza, Eskom’s chairman, told parliament the utility dropped plans to ask the PIC to convert some of its debt into equity because it might trigger covenants with some other lenders.

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