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Eskom has engaged legal advisers to advise it on a new domestic medium-term note (DMTN) programme as it looks to raise billions of rands from the domestic debt capital markets to fund critical infrastructure and operational needs.The power producer plans to spend about R343bn over the next five years in capital and operational expenditure. Eskom’s domestic bonds are issued under its registered DMTN programme as guaranteed by the government.The electricity utility has previously guided that its borrowing programme will remain conservative over the next two years, limited to drawdowns from existing facilities.Thereafter, it intends returning to the capital markets to fund expansionary requirements from the 2028 financial year, targeting up to R25bn a year if required. However, Eskom has indicated its intention to secure a credit rating upgrade before re-entering capital markets.In its request for proposal (RFP), looking to rope in commercial law expertise, Eskom said the mooted DMTN was meant to support its future funding requirements and provide additional flexibility in accessing the domestic debt capital markets.However, the proposed DMTN would not replace the existing DMTN — which at some point increased its exposure to R160bn and is often relied on to fund its programmes.“The establishment of the new DMTN programme is not intended to replace, amend, or terminate the existing DMTN programme, which will remain in place in accordance with its terms and conditions. The new programme will operate in parallel with the existing programme, subject to applicable regulatory approvals and Eskom’s funding requirements,” the RFP reads. The RFP goes on to list Eskom’s requirements:Advise on the legal structure, framework and establishment of the new DMTN programme, taking into account the continued existence of Eskom’s current DMTN programme; Draft, negotiate and finalise all legal documentation required for the establishment and registration of the new DMTN, including the programme memorandum;Ensure that the new programme documentation appropriately distinguishes the new programme from Eskom’s existing DMTN and addresses any matters required to avoid ambiguity between the two programmes;Provide legal opinions, memoranda and advice regarding the establishment, implementation and operation of the new programme and its interaction with the existing DMTN; andEnsure that the final documentation provides Eskom with a flexible and efficient platform for future debt issuances while preserving the continued operation of the existing programme.“The successful bidder will not be required to amend, restate, or update Eskom’s existing DMTN programme, except to the extent necessary to consider and advise on the coexistence of the new programme with the existing programme and any related regulatory, disclosure, or operational considerations,” the RFP notes.Any DMTN Eskom seeks to pursue is likely to need the consent of the National Treasury, as taxpayers guarantee the group’s multibillion-rand debt pile.Eskom owns and operates most of South Africa’s base load and peaking generation capacity, armed with more than 25 power stations with a nominal capacity of more than 40,000MW, which use coal, fuel oil, nuclear fuel, water, wind and diesel to generate electricity.The group manages a transmission and distribution network of over 411,000km of power lines, the largest in Africa.The group’s financial strategy over the past few years has focused on deleveraging the balance sheet, enhancing revenue, driving savings and efficiencies, and addressing the municipal debt challenge.Credit rating agencies have expressed concern over the growth in municipal debt, which has ballooned to more than R100bn. Fitch Ratings last month upgraded Eskom’s credit rating, in line with the recent improvement in South Africa’s sovereign credit rating.Moody’s has, however, flagged Eskom’s significant capital expenditure requirements and execution risks associated with the ongoing unbundling process as risks to its ratings.Eskom lost the battle to retain the group’s transmission assets after President Cyril Ramaphosa discarded the utility’s revised unbundling strategy that would have seen it establish a fully independent transmission system operator while retaining transmission assets within the company.Instead, the president established a dedicated presidential task team to oversee the process. There are concerns among some in Eskom’s corridors that the establishment of the independent transmission system operator, which will own the National Transmission Company South Africa (NTCSA) assets, will undermine the financial viability of Eskom.The NTCSA has a mammoth, capital-intensive task of building 14,000km of new high-voltage transmission lines over the next decade to accommodate new renewable generation and stabilise the national grid — at a cost estimated in the region of R440bn.Business Times
