18 February 2009
The South African government has approved guarantees totalling R175.87-billion over five years in support of Eskom’s capital expansion programme, in light of the critical role the state power company plays in the economy.
According to the Department of Public Enterprises, the loan demonstrates the government’s commitment to ensuring Eskom’s financial stability, as the backing will enable the company to maintain a solid investment grade credit rating.
Domestic medium term note programme
Included in the amount is the existing debt issued under Eskom’s domestic medium term note (DMTN) programme: the ES26 (Eskom 2026, 7.85%, maturing 2 April 2026), the ES33 (Eskom 2033, 7.5%, maturing 15 September 2033) bonds and the two Floating Rate Notes (maturing 2026 and 2033).
“The remainder of the guarantees will be to support the issuance of new debt, both locally and internationally,” the Department said in a statement this week. “The guarantees are in addition to the R60-billion subordinated loan in support of Eskom’s capital expansion programme that has already been approved.”
The Eskom Subordinated Loan Special Appropriation Act provides for a multi-year appropriation as follows: R10-billion in 2008/09, R30-billion in 2009/10, and R20-billion in 2010/11.
Eskom has already established sizeable issuances in the bonds and notes issued under the DMTN programme. The bonds issued under the DMTN programme form part of the All Bond Index (ALBI) (ES33 2.64%; ES26 1.58%), which in addition to the size of the issuances creates liquidity in the secondary market.
“Guaranteeing the ES26 and ES33 allow Eskom to utilise the existing DMTN programme to continue raising funds,” the statement read. “Government rights will be subordinated to those of other un-guaranteed lenders and commercial creditors.”
Broader positive implications
According to the department, this commitment by the government has broader positive implications in that it results in an overall credit enhancement, which, in addition to the existing security against some of the existing international and domestic issuances, benefits un-guaranteed lenders.
“If required, government would either repay the debt in its entirety or step into the shoes of Eskom and continue to make payments on Eskom’s behalf,” the department said. “An annual limit, determined by Eskom’s cash flow requirements, will be set on the debt that Eskom can issue each year under the guarantees.”
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