World Bank approves Eskom loan

Eskom Gets ‘Excellent’ Loan Rate of 0.5% Above Libor

By Nasreen Seria and Carli Lourens

April 9 (Bloomberg) -- Eskom Holdings Ltd., South Africa’s state-owned power company, negotiated an “excellent” interest rate on a $3.75 billion loan agreed with the World Bank yesterday, according to Investec Asset Management.

The loan is priced at 0.5 percentage points above the six- month London Interbank Offered Rate, plus an additional 0.24 percentage points that will vary depending on the cost to the World Bank of raising the funds, National Treasury Director- General Lesetja Kganyago, said in a phone interview today.

Eskom, which supplies 95 percent of South Africa’s electricity, will use the funds to build one of the world’s largest coal-fired plants. If the loan hadn’t been approved, Eskom would have been forced to sell an extra 25 billion rand ($3.5 billion) of bonds locally, putting pressure on bond prices, Andre Roux, head of fixed income at Cape Town-based Investec, said in an interview.

“It’s an excellent rate,” said Roux. “Libor is almost nothing at the moment. This is much better than they would have gotten locally. It’s important that this issue was done abroad and not in South Africa. The market wouldn’t have liked that.”

The loan needs to be repaid over 28.5 years, with Eskom given a seven-year grace period, according to the Treasury.

The 6-month Libor rate was at 0.45375 today, according to the British Bankers’ Association. By contrast, the yield on Eskom’s ES18 bond, due 2018, was trading at 9.145 percent today.

Funding Gap

Eskom sought the loan to help close a funding gap for a 460 billion-rand, five-year expansion plan aimed at preventing a repeat of power outages in 2008 that shut mines and factories. The utility plans to borrow 45 billion rand over the next three years and has raised electricity prices by 25 percent this year.

“South Africa generally and Eskom particularly have appreciated that, simply because of the sheer weight of funding demand, the burden of cost bearing can’t just fall on consumers, but that they must explore innovative measures such as World Bank lending as well as potential private equity participation,” Goolam Ballim, chief economist of Standard Bank Group Ltd., said in a phone interview from Johannesburg today.

The World Bank hasn’t set any conditions on the government’s economic policy as part of the loan, Kganyago said. This is the first major World Bank loan to South Africa since the end of apartheid in 1994. “This isn’t a structural adjustment loan,” Kganyago said. “There is nothing that impinges on economic policy. In our engagements with international financial institutions, we aim to protect the integrity of domestic economic policy formulation.”