Eskom is looking to convert debt into equity for its lenders as a solution for its liquidity challenges. Eskom is struggling to recapitalise its business as its debt burden continues to worsen. Government has asserted that it is not in a position to bailout the utility, therefore the new leadership will have to find creative ways of reducing debt and building equity in the company. Eskom’s debt currently stands at R397 billion.

Energy analyst and Managing Director at EE Publishers, Chris Yellend said that the debt-to equity swap is a viable solution but is totally dependent on the shareholders and lenders’ risk appetite.

“The existing shareholder, which is government, will need to be happy to take on additional shareholders. So in the first instant it’s a shareholder decision, but then secondly of course, you have to find lenders, people who hold Eskom debt, who are prepared to swap for this equity, as they will only do so if the terms of the arrangement, in other words the return on debt is better than holding equity.”

Yellend said that while the debt-to-equity solution is possible and has been used in other industry areas, its success could not be guaranteed. Such was the case for the Industrial Development Corporation, which also happens to be one of Eskom’s lenders.

” In the past the IDC has indeed swapped debt for equity and one such example is the case of Shiva Uranium, a Gupta company, which owed the IDC a lot of money, and there was a debt for equity swap and the IDC was left with equity. It was a very bad deal for the IDC because the share value of the Shiva Uranium and Oakbay dropped to the floor.”

While Eskom has also mentioned selling some of its non-core assets to recapitalise the company, Yellend says the utility has a number of options at its disposal to build its cash reserves.

“Other options to recapitalize the business include listing on the stock exchange so that pension fund investors and in fact the general public can become shareholders. Another option is to find strategic equity partners that are not necessarily listed on the stock exchange but that are typically large energy companies that would like to invest in the business,” said Yellend .