The New Development Bank (NDB) (formerly BRICS Bank) plans to loan Eskom, the South African state owned utility provider US$180mn (ZAR2.6bn).
Proceeds of the loan will be used to construct transmission lines that will connect 500 megawatts of renewable energy provided by Independent Power Producers (IPPs) to the national grid.
The recent performance of the South African sovereign has affected the corporate’s fiscal position. As a result, the company has turned to Development Finance Institution (DFI) lending as it is cheaper than accessing the Eurobond market.
“Utility companies tend to take the loan route, especially if provided by DFIs, as they usually provide concessional lending and are cheaper than the Eurobond market,” said Joe Delvaux, Senior Fund Manager – Duet Africa Credit Fund at Duet Asset Management.
He added that any corporate based in a BRICS member state receiving a loan from the NDB could further benefit as it would likely gain additional concessions resulting from the sovereign’s membership of the BRICS union.
DFIs are prevalent across Africa because they provide funding for infrastructure, the development of which is key to the region’s growth. Africa currently has a large infrastructure deficit. South Africa in particular is especially prone to power shortages, a sector in which Eskom operates.
The timing of the transaction also plays a large role in Eskom’s decision to take out a loan. Delvaux stated that the current debt burden on emerging market corporates is very high, and has recently seen a large increase. “The loan market provides more favourable borrowing opportunities,” he noted.
