SAA to Eskom Need Billions to Ensure Sustainability, Brown Says

South Africa’s government said state power utility Eskom Holdings SOC Ltd. and South African Airways SOC Ltd. need a combined 300 billion rand ($28 billion) rand in additional funding to ensure their sustainability.

Eskom needs to secure 250 billion rand within weeks to avoid its debt being cut to junk, while SAA probably needs 50 billion rand to stay afloat, Public Enterprises Minister Lynne Brown, who oversees both entities, said at a briefing in Johannesburg today. The government is considering providing the power utility a capital injection and convertible loans as well as giving it and the airline guarantees to raise private funding, she said.

While the government sees Eskom and SAA as strategic assets, its ability to back them financially is constrained by lackluster growth and tax revenue. It also faces demands from poor communities to improve housing and sanitation and pressure from ratings companies to reduce the budget deficit.

“We are looking at how to get Eskom out of its trouble because it has a short time to prove it is on a good footing to credit agencies,” Brown said. “The main thing is to prevent a downgrade on Eskom from the credit agencies and the country as a whole from getting downgraded.”

Eskom is rated BBB-, the lowest investment grade, by Standard & Poor’s, with a 50 percent chance of being downgraded by mid-September. The utility, which provides 95 percent of South Africa’s electricity, has a funding deficit of 225 billion rand for the five years to 2018 and has been forced to implement managed blackouts this year as it struggles to keep the lights on after a decade of underinvestment in power plants.

Charge Consideration

A downgrade to junk would significantly raise borrowing costs for Eskom, the country’s biggest corporate-bond issuer, with about 255 billion rand of debt outstanding. South Africa’s energy regulator last week approved a tariff increase that could amount to 5 percentage points on top of the 8 percent previously agreed. Prices may have to rise further for Eskom to plug its funding gap.

The government currently has a provision to back 350 billion rand of the utility’s debt, of which the company has used a third.

“With costs escalating and the government being downgraded, we don’t deem that to be full support in all circumstances anymore,” Mark Davidson, director of infrastructure ratings at S&P, said June 24, referring to the guarantees. “The total debt could exceed 350 billion rand” and the government needs to demonstrate “more support” to the company to minimize the chance of a downgrade,’’ he said.

Country Rating

South Africa’s long-term foreign currency debt is rated at the same level as Eskom debt by S&P.

“Government is still engaged in trying to find a way of addressing Eskom’s financial position and its sustainability,” Finance Minister Nhlanhla Nene told reporters in Pretoria today. “We will come to the public once we have got to that point and Cabinet will actually announce the necessary interventions.”

Selling Eskom to resolve its funding needs has been ruled out as an option, said Brown, the public enterprises minister.

“Government would not want to privatize Eskom because government must have access to the economy, how it directs the economy to fulfill developmental goals,” she said. “It’s not government policy to privatize at this stage.”

SAA Losses

SAA accumulated total losses of about 16 billion rand as of March 2013. While the airline is surviving off loans backed by the state, it doesn’t have outstanding bond debt.

“We are looking at guarantees for funding for SAA,” Brown said. “They have to meet conditions of the open market” and secure loans or sell bonds.

SAA has hired KPMG LLP to advise on the acquisition of about 25 aircraft to replace older models and reduce operating costs, Chief Executive Officer Monwabisi Kalawe said yesterday. The airline is battling with an aging long-haul fleet and won’t break even until fiscal year 2016 or 2017, Kalawe said.

“SAA has never been to the bond market over the past decade at least,” Rashaad Tayob, who helps manage 65 billion rand at Abax Investments (Pty) Ltd., said by phone from Cape Town. “There will be a market for the airline’s debt if there is a state guarantee.”

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