Eskom Has $25 Bn Hole Bonds Can’t Fill: S. Africa Credit

Eskom Holdings SOC Ltd. is facing a $25 billion funding gap over the next five years that the South African power utility may be unable to fill with bond sales, jeopardizing timetables for building plants to avoid blackouts.

Yields on the power utility’s dollar bonds due January 2021 rose for the seventh straight day yesterday after Eskom on July 10 said it would need 50 billion rand ($5 billion) more than planned to meet funding needs in the five years to 2018. The rate climbed 40 basis points to 6.04 percent in the period, versus a two basis-point rise in South Africa’s dollar debt due in March 2020 and a nine basis-point jump in the average yield of emerging-market utilities tracked by JPMorgan Chase & Co.

Eskom, which generates about 95 percent of South Africa’s power, delayed the start of the world’s fourth-biggest coal-fired power plant this week by at least six months after labor disruptions and the discovery of faulty boiler welds. The failure to push through big-enough price increases has created a 225 billion-rand cash-flow shortfall as the company struggles to meet the continent’s biggest economy’s electricity demands.

“The big question is how much they can raise,” Morten Groth, who manages $1.7 billion in emerging-market bonds at Jyske Bank A/S in Silkeborg, Denmark, said by phone yesterday. “Raising that money from markets in the traditional way would be tough. One potential could be raising money from a country like China, or a sovereign wealth fund.”

Borrowing Needs

While Eskom had planned to borrow just over 200 billion rand in the five years through 2018, it plans to add 50 billion rand to that because of the lower price increase, said Caroline Henry, the company’s treasurer and acting financial director. The energy regulator will allow Eskom to raise prices by an average of 8 percent in each of the next five fiscal years that started in April, half the amount the company had requested.

“We will have to go out to both the domestic and international markets on bond issues,” she said on a July 10 conference call. “We’re also looking at other forms of financing.”

Though Eskom said it can fund 15 percent of the shortfall, it is yet to determine where money for the rest will come from, Paul O’Flaherty, who left his position as finance director on July 10, told reporters that day.

Debt Guarantees

Eskom’s costs for coal, which the company uses to generate 85 percent of its power, surged 24 percent in the year through March, and the regulator has provided for single-digit increases in the next five years, O’Flaherty said on the call.

Eskom has about 203 billion rand of debt and interest outstanding, it said in a July 9 presentation. The South African government guarantees as much as 350 billion rand of the state-owned power utility’s debt.

Because of the government support, Eskom shares South Africa’s BBB credit rating at Standard & Poor’s, the second-lowest investment grade. Without the state, the company’s standalone assessment is six steps lower at B, S&P says. Eskom isn’t seeking further support at present, Henry said.

“The government needs to guarantee the debt,” Andre Roux, who as head of fixed income at Investec Asset Management manages 120 billion rand of South African bonds, said by phone yesterday. “I don’t think anyone would lend Eskom money without some government support given the uncertainty in the tariff environment, in the build program and the timing and costs.”

Plant Delays

The rand slipped 0.4 percent to 10.0351 per dollar by 2:58 p.m. in Johannesburg, extending the decline this year to 16 percent. It’s the worst performer against the dollar in 2013 among 16 major currencies tracked by Bloomberg.

Delivery of the first power from Eskom’s 4,800-megawatt Medupi coal-fired plant has been delayed by at least six months to mid-2014 because of labor unrest and “underperformance” by contractors, raising its cost by as much as 15 percent to 105 billion rand.

“This is an MBA project on how not to run a company,” Reuben Beelders, a fund manager at Gryphon Asset Management in Cape Town, who helps oversee 3.5 billion rand of assets, said by phone. “It’s absolutely disastrous. They’ve got a lot of work to do to restore confidence in their ability to manage the operation.”

Eskom didn’t immediately respond when called for comment.

Electricity Demand

Power demand has threatened to overwhelm Eskom’s capacity, especially during the winter months. The nation had a peak power-supply deficit of 515 megawatts on June 13. The target is for supply to exceed demand by 15 percent. South Africans were confronted by average power-price increases of 25 percent in each of the past six years to help Eskom finance spending to overcome the shortage. A megawatt is enough electricity capacity to power as many as 1,000 homes.

Selling half of the 250 billion rand of debt locally and half overseas “is not mindblowingly large,” Investec’s Roux said. A bigger problem for Eskom is the global sell-off of emerging-market bonds, he said, referring to rising yields since Federal Reserve Chairman Ben S. Bernanke last month signaled he may slow bond buying should the U.S. economic recovery continue. On July 10, Bernanke called for maintaining stimulus.

Foreign investors have been net buyers of 19.3 billion rand of bonds this year, 79 percent less than a year earlier, according to data from JSE Ltd., which runs the nation’s stock and bond exchanges.

“South Africa government bonds will not escape that trend,” Beelders said. “The cost of borrowing is likely to rise. That’s bad for Eskom. They have decided to expand capacity at a point in time that is not opportune.”

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