Eskom published a JSE stock exchange announcement earlier this week warning its bondholders that there may be more bad news relating to irregularities when it releases its financial results for the year ended 31 March, likely to be released later this month. Eskom said disclosure on the quantum of the uncovered reportable irregularities and irregular expenditure would be published with the release of the company’s annual financial statements.
The company came dangerously close to having its bonds suspended by the JSE and to defaulting on debt and other obligations when the release of its interim financial statements for the six months to the end of September 2017 was delayed in January this year. After Eskom secured commitments of support from certain banks, its auditors issued an unqualified review but with an “emphasis of matter” on its ability to continue as a going concern for the next year to 18 months. Eskom’s liquid assets dwindled to R9-billion at the end of September from R30-billion the year before as a result of flat revenue caused by falling sales and lower-than-anticipated tariff increases.
The new chairman of Eskom, Jabu Mabuza, recognised at the time that the overriding problem at Eskom — apart from governance — was the company’s R360-billion debt burden. At the end of September 2017, its gearing ratio (debt to equity) had risen to 72%. Mabuza said that Eskom’s debt levels were simply “unsustainable”.
The latest announcement by Eskom raises serious concerns. Eskom spokesman Khulu Phasiwe explained that as part of the JSE debt listing requirements, Eskom had to inform bondholders about the looming disclosure of irregularities because its bonds were listed on the bourse. Is there more bad news coming? Eskom’s auditors qualified its results for the year ended 31 March 2017 because they could not express an opinion on the completeness of the irregular expenditure reported. Its auditors, SizweNtsalubaGobodo, also said that they had identified reportable irregularities in Eskom’s financial results for the six months ended 30 September 2017.
The Eskom announcement was made against the background of finance minister Nhlanhla Nene daring Eskom unions to table proposals on how the fiscus can foot the bill for wage increases when they meet with him. This was after the National Union of Mineworkers, Solidarity and the National Union of Metalworkers of South Africa had sought intervention from Nene and public enterprises minister Pravin Gordhan after they failed to reach an agreement on wage increase with Eskom earlier this week.
Three weeks ago, Nene commented during an investor road show in the UK that there was no money to bail out Eskom to help the entity with the salary hikes. Speaking during the World Economic Forum roundtable, Nene said Eskom posed a serious challenge to attracting investment in South Africa. Former finance minister Gordhan warned earlier this year that major international investors refused to buy bonds from Eskom because of bad governance and rampant corruption. Goldman Sachs said in September 2017 that Eskom is the biggest single risk to South Africa’s economy.
Eskom depends on government support to service its R368-billion of debt. Eskom needs R72-billion of funding until the end of 2019, including the refinancing of a R20-billion loan obtained with a government guarantee, according to a March report published by Moody’s Investor Services. An Eskom default on its debt would be catastrophic for the South African economy as it would trigger cross defaults of all government debt.
Developments in the next few weeks will be keenly watched by international and South African investors alike.
- Ian Matthews is head of business development at Bravura, an investment banking firm specialising in corporate finance and structured solutions services