South Africa’s multibillion-dollar initiative to expand its electricity transmission network could provide a much-needed boost to the country’s corporate bond market, which has struggled to recover from a post-pandemic downturn.
NTCSA Announces $6.4 Billion Transmission Expansion
The National Transmission Company South Africa (NTCSA), a newly operational state-owned entity separate from its parent company, Eskom Holdings SOC Ltd., has announced a plan to invest 112 billion rand ($6.4 billion) over the next five years to enhance the country’s electricity transmission capacity. This investment is seen as essential for improving South Africa’s energy infrastructure, but also presents opportunities for capital market funding.
The NTCSA, which began operations on Monday, is considering various models for building this infrastructure. These include constructing transmission lines directly, outsourcing development to third parties, and issuing concessions to private companies. Although no final decision has been made on how the expansion will be funded, Rand Merchant Bank (RMB) has indicated that some of the necessary financing will come from capital markets.
Capital Markets as a Crucial Funding Source
RMB credit analyst Kate Rushton noted in a report that the transmission infrastructure is capital-intensive and will require long-term funding. Rushton emphasized that the debt market, including traditional lenders such as banks and the bond market, will play a crucial role in financing the project.
The corporate bond market in South Africa, which has been under pressure since the onset of the COVID-19 pandemic, could benefit from new issuance tied to this infrastructure spending. State-owned enterprises like the NTCSA could help inject life into the bond market, where new issuance has yet to return to pre-pandemic levels.
Potential Revival of Corporate Bond Market
In 2019, bond sales by South African companies totaled 169 billion rand, but this figure plunged during the pandemic. Issuance this year stands at 116 billion rand, with estimates suggesting it could reach 131 billion rand by the end of 2024. State-owned companies have contributed just 15 billion rand to this total.
Valdene Reddy, director of capital markets at JSE Ltd., which operates South Africa’s stock and bond markets, sees potential for growth in the bond market as the NTCSA moves forward with its projects. Reddy highlighted the importance of restructuring the transmission company’s balance sheet and developing a pipeline for capital-raising initiatives, whether in the form of equity or debt. While she acknowledged that these efforts might take time, she emphasized the long-term benefits they could bring to the market.
Eskom’s Debt and Funding Challenges
Moody’s Ratings recently highlighted the challenges facing Eskom, the NTCSA’s parent company, which would need to raise debt to finance its network investments. Moody’s pointed out that Eskom’s ability to access capital markets on commercial terms would require significant improvements in its operations, governance, and regulatory arrangements. Currently, Eskom’s debt is rated B2 by Moody’s, five levels below investment grade, with the company facing “very high credit risk.”
The South African National Treasury is working on a credit-guarantee program backed by the World Bank’s Multilateral Investment Guarantee Agency (MIGA) to reduce risks for private investors. This program is expected to replace the government’s previous explicit guarantees, which were used to support private investment in renewable energy projects but also added to the country’s contingent debt liabilities.
Private Sector Investment and Climate Finance
Jaideep Sandhu, chief technology officer of global renewable energy business Engie SA, said that government guarantees would likely be a requirement for private sector investment in transmission projects. This sentiment was echoed by sources familiar with the NTCSA’s plans, who indicated that such guarantees could also play a role in unlocking funding from South Africa’s $9.3 billion climate finance pact, known as the Just Energy Transition Partnership.
The ability of the market to absorb the transmission expansion spending will depend on the structure of the issuer and the guarantees in place, according to Thys Louw, a portfolio manager at Ninety One UK Ltd., the fifth-largest holder of Eskom debt. Louw noted that while the amount required — more than $1 billion annually — is substantial, the South African debt market could handle it if the projects are structured appropriately. The final details, including how much the market will be asked to absorb and the pricing of the debt, will be critical in determining the success of the funding initiative.
Conclusion
The planned $6.4 billion expansion of South Africa’s electricity transmission network by the NTCSA presents a potential turning point for the country’s corporate bond market, which has been slow to recover from the economic disruptions caused by the COVID-19 pandemic. With state-owned companies like the NTCSA seeking long-term funding for capital-intensive projects, and with support from potential government guarantees and international climate finance, there is optimism that this infrastructure spending could help revitalize the bond market and drive new investment in the country’s energy sector.
Related Topics:
