South Africa’s heavily indebted electricity provider looks at domestic and international Sukuk

South Africa’s debt-ridden electricity provider Eskom is mulling a US-dollar denominated Sukuk issuance while seeking proposals for a potential domestic Sukuk sale, MARC ROUSSOT reveals. If it materializes, the transaction would be the country’s first corporate Sukuk deal.

Between its ever-growing debt, recurring power cuts and top executives quitting their jobs, Eskom has been grabbing South Africa’s headlines for all the wrong reasons over the past few months or even years.

Against this rather dramatic backdrop, the distributor of approximately 95% of South Africa’s electricity released a request for proposals on the 9th July for a potential domestic Sukuk issuance as the company is seeking to diversify sources of debt and execute cost-effective funding with acceptable risk.

The proposals must be submitted by the 7th August and contain recommendations on a potential underlying asset, provide a timeline, propose a size as well as a tenor and mention an indicative pricing. Lead managers will then be picked based on the proposals to assist Eskom in the potential domestic Sukuk issuance.

“The intention of the request for proposals is to test the market for the potential issuance into the domestic market while simultaneously investigating issuance in the international Sukuk market,” Eskom told IFN without elaborating on how the proceeds could be used.

The state-owned electricity provider, with debt now reaching close to ZAR500 billion (US$35.93 billion), is in dire need of cash as it is even struggling to pay interest on its debt comprising eight conventional securities — six US dollar-denominated papers and two domestic papers — currently listed on the Luxembourg Stock Exchange, with two maturing as early as 2021.

Eskom ended up in this financial quagmire due to its high operating cost and the construction of two new coal-fired power plants in Medupi and Kusile that are running years behind schedule and way over budget.

Despite recent tariff hikes granted by the energy regulator, financial support from the treasury amounting to ZAR23 billion (US$1.65 billion) over the next three years and a debt–equity swap proposal from the Public Investment Corporation which manages about US$150 billion and is responsible for the pensions of more than one million state workers, Eskom remains massively indebted.

Adding on to this already dreadful situation, Eskom will very soon look like a headless chicken as its CEO, Phakamani Hadebe, has resigned and will be leaving at the end of July.

Phakamani will be followed by Andre Pillay, the company’s treasurer and a key figure in elaborating Eskom’s funding plan, who will quit in August. Both are recognized as fixed income specialists.

In this context, it remains to be seen whether Eskom, assigned a ‘CCC+’ credit rating with a stable outlook by S&P Global Ratings and a ‘B2’ long-term corporate family rating by Moody’s Investors Service, can secure better pricing with an Islamic instrument compared to a conventional one.

This is not the first time that Eskom is looking to raise funds from the Islamic capital market. Back in 2015, Brian Molefe, the then-CEO of the company, had announced a global Sukuk issuance which never came to fruition.

The deal was announced a year after South Africa’s maiden Sukuk issue worth US$500 million. Maturing on the 24th June 2020, the sovereign paper was more than four times oversubscribed with an orderbook of US$2.2 billion.

This article first appeared in IFN Volume 16 Issue 29 on the 23rd of July 2019

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