FIN24 / 02 JUNE 2019 - 12:00 / ANTONY SQUAZZIN - BLOOMBERG
The labour union whose members contribute most to the funds overseen by South Africa’s state pension manager wants the institution to stop investing in the debt of Eskom, potentially increasing funding pressure on the heavily indebted utility.
The 240 000-strong Public Servants Association (PSA) said by buying Eskom's bonds the Public Investment Corporation (PIC) is exposing pensioners to excessive risk as the state-owned power company is not selling enough electricity to cover its costs and has had to be bailed out by the government.
The Government Employees Pension Fund (GEPF), managed by the PIC, holds R54.8bn of Eskom bonds, or 16.8% of all the debt outstanding, more than five times the next-biggest holder, according to data compiled by Bloomberg. The PIC owns an additional R8.5bn of Eskom bonds on behalf of other clients.
"The PIC needs to get out of Eskom," Tahir Maepa, the PSA’s deputy general manager for members' affairs, said in an interview. "So long as they have the PIC as a piggy bank they will never be able to sustain themselves and run like a business. Eskom should be a business and not rely on bailouts from pensioners' money."
The influence of the PSA and other unions on the PIC and its policies is about to increase as three labour leaders, including the PSA’s top executive, are set to be appointed to the interim board of the 108-year-old fund manager, Africa’s biggest with more than R2trn under management. The current 11-member board had offered to resign due to a succession of scandals exposed in an ongoing governance probe.
The PIC is already under pressure from the government to adopt a mandate that includes economic growth and black economic empowerment rather than focusing purely on financial returns, and is likely to be pushed to keep propping up the power utility.
To be sure, Eskom debt, most of which is guaranteed by the state, hasn't performed badly: rand bonds due 2026 have returned 7.6% this year compared with 5.6% for comparable government securities. The company's 2025 dollar bonds have returned 13.6%, more than twice the 6.3% average for high-yield emerging-market corporate debt, according to Bloomberg indexes.
Yields on the 2025 securities climbed nine basis points on Friday, paring the drop this year to 236 points, suggesting investors are confident the government won't let Eskom default after President Cyril Ramaphosa said the utility is "too big to fail."
If the PIC were to sell its Eskom it would be unlikely to find buyers given the amount involved, said a money manager that holds the debt of a number of South African state companies including Eskom. The person asked not to be identified because the institution they work for hasn't made its views on this matter public.
A sale of the debt would also be a blow to the viability of Eskom and would damage the creditworthiness of South Africa and the government bonds held by the GEPF, the bondholder said.
A sale by the GEPF "would be a problem, we already know that Eskom has massive liquidity issues and can't roll over their debt," said Bronwyn Blood, a fixed-interest portfolio manager at Cape Town-based Granate Asset Management, who said her organisation sold its holdings about three years ago.
Still, she said she agreed with the position taken by the PSA. "The professional market as a whole does hold that view," she said.
The PSA's criticism of the PIC is not the first by an organisation representing government workers and pensioners. In January Albert van Driel, a representative of the Association for Monitoring and Advocacy, told the commission of inquiry into the PIC that the investment in Eskom bonds was reckless and politically driven.
"Government wants to treat GEPF money as if it's government money," Maepa said. "This is private money and when they do these things they don't even consult the depositors."
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER