South Africa: Embattled Eskom looks to Islamic-model financing to ease debt woes

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“Eskom has assessed the viability of an innovative local-currency South African-based sukuk funding solution that would enable Eskom to further develop its borrowing plan,” the entity said in a request for proposals posted on the National Treasury website.

Eskom has appointed a lead arranger “to work towards establishing timelines for the issue,” company spokesperson Sikonathi Mantshantsha added Monday.

ESKOM IN DEBT

The struggling utility is about R450bn in debt and indications are that it has no current plans to approach government for additional cash injections. Eskom is currently owed R28bn by municipalities.

Responding to questions in Parliament last month, Public Enterprises Minister Pravin Gordhan said Eskom was at an “advanced stage” of its unbundling process.

“Business models for the divisions and corporate functions for the first phase of divisionalisation are at an advanced stage,” he said.

“A total of 8890 employees have been linked to the operating divisions, of whom 6500 are from head-office functions. The volume of staff enables the line divisions to function separately. Divisional managing directors have been appointed, divisional boards have been appointed, divisional board members for all three divisions of Eskom have already been meeting, and cash-flow statements and income statements are in place for the divisions,” said Gordhan.

He added the fact that the divisions would trade with each other would allow for better balancing and forecasting of predictive loads due to the penalties and benefits in the trading system.

Eskom’s funding plan “requires sizable funding that can provide diversification and longer tenors at reduced finance costs,” the utility said.

WHAT IS A SUKUK?

A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Islamic religious law commonly known as Sharia.

Since the traditional Western interest-paying bond structure is not permitted in Islam, the issuer of a sukuk sells an investor group a certificate, and then uses the proceeds to purchase an asset, of which the investor group has partial ownership. The issuer must also make a contractual promise to buy back the bond at a future date at par value.

Reports say Shariah-compliant bonds have been considered as a funding source by Eskom since at least 2012. It said two years later that it would monitor the South African government’s debut sukuk issuance as a barometer for future funding plans. And while the government has sold one dollar-denominated sukuk, it hasn’t issued one in the rand market.

In 2014, South Africa successfully concluded its debut US$500m 5.75 year sukuk bond issuance in the international capital markets.

Pretoria said at the time that the decision to issue an Islamic bond was informed by a drive to broaden its investor base and to set a benchmark for state-owned companies seeking diversified sources of funding for infrastructure development.

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