Ask the CEO of Nedbank Group Mike & Brown, how to save a beleaguered state-owned energy company in South Africa, and his approach is simple: give her cash first, then consider converting debt to capital later.
Eskom pays so much of interest on debt – at the same time as its income falls – that the company is trying to keep the light in the country. To ease the shortage of cash, the government plans financial assistance in the amount of 2030 billion. While the state initially wanted to spread, that within 10 years, a significant part is now accelerated, with details expected from the Treasury on July 23.
Read: Eskom receives a rescue option because PIC proposes to convert debt into shares
"For practical reasons, we do not have any easy or good options at this stage." Brown said in an interview in Durban on the east coast of South Africa on Friday. Introducing a rescue package or increasing the amount "is the most practical short-term solution".
Other suggestions are being considered to make it easier for Eskom to charge over 440 billion debts, 70% of which are guaranteed by the state. One of them proposes to convert Eskom's debt on behalf of more than 1 million employees into equity, as Bloomberg reports on July 11. Another is said to include closing coal-fired power plants at an early stage to get cheaper financing and make room for renewable energy.
Green energy is "a possible alternative but extremely complicated to implement and it can take three to five years to start working," Brown said. "Eskom has a six-month problem".
While "some form of change in which Eskom bond holders would be able to convert Eskom bonds into government bonds" is a potential answer, it is also complex and would take more time than the release of emergency funding through a special funds account, the president said.
The Public Investment Corporation, which manages around $ 150 billion, mainly in pensions for government officials, could be hit if Eskom's debt, which it owns, has been converted into shares, said Richard Segal, senior market analyst at Manulife Asset Management in London.
"The value of capital would probably be lower than the value of debt" – he said. "It may not fit" with trustees of pension funds.
This may lead to some positive changes in Eskom if PIC obtains a management representation and some management control, Segal said, "although this may also lead to management fights, which worsens the situation."
Eskom would have to be completely reorganized to change the debt into shares, which may take many more years, said Darias Jonker, director based in London, consultant of Eurasia Group Ltd., especially considering employee organizations, are completely against any reconfiguration in Eskom . A study by the World Bank in 2016 showed that the company must reduce 66% of the workforce.
"There will be no final agreement to make the debt balanced, in other words, a debt that can be fully supported from Eskom revenues in the next 12-24 months," he said. Even the "reinforced rescue package", which is to be presented in detail in the coming weeks, "is not enough for debt to be balanced."
While Brown Nedbank is an optimist, the government will have to make difficult decisions, with the burden ultimately borne by the South African society being covered.
"Eskom can be saved, but I do not believe that Eskom in the current model is suitable for South Africa in the future," he said. "It's about the business model on the one hand and paying the price for the level of Eskom debt. Taxpayers are the only place where Eskom will seek funding over time. "
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