Eskom Considers Equity-Like Debt to Fill $21.9 Billion Funds Gap

Eskom Holdings SOC Ltd., which generates about 95 percent of South Africa’s electricity, said it’s weighing the sale of equity-type debt to fill a 225 billion-rand ($21.9 billion) funds gap as it builds new plants.

“Our next challenge is probably to go and find investment that is going to bolster the balance sheet” with “equity-like debt,” Caroline Henry, the acting chief financial officer, said in an Aug. 26 interview. “That is not something that has been discussed or agreed upon, but given the huge funding gap of 225 billion rand there is no doubt we need to consider everything.”

The company, which is spending 500 billion rand retooling old plants and building new ones to avoid a repeat of blackouts that halted output at factories and mines for five days in 2008, faces the cash-flow shortfall because regulated power-price increases don’t cover its expansion costs. The National Energy Regulator on Feb. 28 allowed Eskom to raise tariffs by an average 8 percent in each of the next five years, half the amount it requested.

On June 13, demand for electricity outstripped supply by 1.5 percent, forcing Eskom to ask some of its biggest customers to reduce consumption. The power shortage is hampering the growth of South Africa’s economy, which the central bank forecasts will expand 2 percent this year, the slowest rate since a 2009 recession.

Eskom issued $1 billion of debt on Aug. 6 maturing in 2023 and paying a coupon of 6.75 percent. The yield on the investment-grade notes has risen 13 basis points, or 0.13 percentage point, since then to 7.04 percent by 111:53 a.m. in Johannesburg.

Eskom has outstanding debt of 231 billion rand, according to data compiled by Bloomberg. Debt that resembles equity may include payment-in-kind notes and project financing.

The company anticipated it would improve its credit ratios over the next five years, Henry said.

“We can’t deliver significant improvement now with the current 225 billion rand taken out of the base,” she said.

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