Eskom, the South African state-owned utility, has hired Lazard as financial advisor, according to three sources close to and a source familiar with the situation.
The company issued a request for financial advisors earlier this year to assist on refinancing options, with some dozen or so ‘Big Four’, international and local banks pitching, as reported by Debtwire in May.
The mandate is for balance-sheet optimisation. The aim is to secure improved credit ratings allowing Eskom to return to the international capital markets, said one of the sources close.
The highly-levered utility is seeking to raise ZAR 72bn in borrowing for FY18/19, including ZAR 20bn from international capital markets, according to an April presentation. But in recent months, yields on Eskom bonds have risen sharply. A recent media report suggested that a liability-management exercise was being planned. Last Friday, their 2021 bonds were bid at 96.0, a 7.49% yield.
Eskom notes with concern recent media reports which the company says incorrectly suggest the company plans to restructure or extend its debt. “We remain committed to executing our approved borrowing programme” said Andre Pillay, Group Treasurer at Eskom. “Eskom plans to raise an amount of ZAR 72-billion in the current financial year, of which 23% (ZAR 16.4-billion) has already been secured, and the company is at advanced stages of ensuring that the funding requirement for the current financial year is fulfilled in a timely manner,” added Pillay. Eskom is working on a new corporate plan which will provide direction on how the company is expected to look going forward and what its role will be in both the domestic and continental energy markets. The review of the corporate plan is expected to be completed by the end of this year.
Following the appointment of Cyril Ramaphosa as President, the Eskom board was replaced and Phakami Habede hired as the new chief executive. In a forthright company statement announcing the appointment, Eskom noted that the company has been mired in allegations of “wholesale corruption at the utility, a collapse in governance and an audit qualification on irregular expenditure.”
According to a fourth source close to the situation, law firm White & Case is advising Eskom’s Treasury on its debt management.
Eskom did not respond to requests for comment on Lazard’s appointment.
Without support from the South African government it may be stretch to find an additional ZAR 60.8bn (ZAR 11.2bn already committed) in the 2018/19 financial year – made up of ZAR 6.5bn from DFIs, ZAR 4.8bn from ECAs, ZAR 20bn from international bonds, ZAR12.5bn from domestic notes and ZAR 8bn from structured notes.
The company has been funding locally via private placements and reverse enquiries with interest from local and international investors, according to a South Africa-based banker. Eskom’s local programme is fully government guaranteed and they tend to issue long-dated high yielding paper, he added.
According to our latest credit report, Eskom’s standalone leverage is now above 13x. If South Africa were to assume its liabilities, it would raise its debt-to-GDP ratio by 12% to the mid-to-high 60s.
On1 February, PIC – the state pension fund – lent ZAR 5bn of one-month money (with full government guarantee) giving time for another ZAR 20bn loan (another guarantee) to arrive by month-end. There are ZAR 350bn of contingent guarantees from the South African government (with more than ZAR 250bn utlilsed) and another ZAR 55bn plus is needed to back this year’s capex funding.
If the SA Government is called on its guarantees – it could lead to a sovereign downgrade. But despite this, it did give strong words of support in February, helping the auditors to grant it going-concern status, as reported. Eskom floated on its conference call in February the idea of debt-for-equity swaps with certain lenders. With PIC and DBSA amongst the largest lenders the most likely outcome is a government-led political solution, according to the fourth source close.
According to a second source familiar with the situation, the mandate is being handled by Lazard’s sovereign-debt advisory team.
by Chris Haffenden, David Graves and Laura Gardner-Cuesta