While President Cyril Ramaphosa says power utility Eskom is considered too big to fail, S&P Global Ratings has a different view: it could be too big to support.

The government’s commitment to provide Eskom R23-billion annually for three years is insufficient on its own to improve the company’s liquidity outlook and credit rating, and will act as a constraint on fiscal consolidation, raising the country’s overall debt burden, Engineering News reported, citing S&P Global Ratings director Ravi Bhatia.

That may further rattle investors who have been steady sellers of the company’s dollar bonds: yields on 2021 securities have been rising for nine straight days, the longest streak since October 2015, and are now at a two-month high. At the same time, the cost of insuring South Africa’s sovereign debt against default has climbed above 200 basis points as traders consider the potential effect of Eskom’s crisis on state finances.

Eskom cannot continue in its current form, but the costs associated with restructuring it are enormous and are ones that the fiscus can hardly afford

S&P’s comments highlighted “the enormity and cost of the task of restructuring Eskom into a more financially viable entity”, said Bronwyn Blood, a fixed-interest portfolio manager at Cape Town-based Granate Asset Management. “Eskom cannot continue in its current form, but the costs associated with restructuring it are enormous and are ones that the fiscus can hardly afford.”

South Africa’s state-owned power utility is straining under more than R440-billion of debt, more than half of which is guaranteed by the government. It isn’t selling enough electricity to cover its operating and borrowing costs.

Eskom’s liquidity position is “exceptionally fragile”, and this is unlikely to change in the foreseeable future, Engineering News reported, citing Omega Collocott, a corporate ratings director at S&P. Further bailout options were being considered for Eskom and said an option would be to use the government’s R350-billion debt-guarantee framework to directly assume repayments on behalf of Eskom, Collocott was cited as saying.

CEO

S&P didn’t immediately respond to e-mailed questions.

In the midst of plans to restructure the business, Eskom’s board also needs to find a CEO to replace Phakamani Hadebe, who said he will step down at the end of July due to health reasons. “This role comes with unimaginable demands,” he said in a 24 May statement.

The utility, which is expecting a consecutive annual loss for the financial year ending in March, said it usually announces the much anticipated annual results in July, but hasn’t set a date. — Reported by Colleen Goko and Paul Burkhardt, with assistance from Ana Monteiro and Renee Bonorchis, (c) 2019 Bloomberg LP