South Africa’s embattled national power utility Eskom has new plans to issue a $58 million (R1 billion) sukuk bond in a bid to diversify funding sources as borrowing costs rise.
According to spokesperson Sikonathi Mantshantsha, Eskom has appointed a new lead arranger “to work towards establishing timelines for the issue.” The power utility currently has over R450 billion in debt and has yet to announce further plans to ask the South African governments for additional capital injections.
What is a sukuk?
According to IOL, a sukuk is a Shariah-compliant investment and an attractive alternative to conventional bonds. For all intents and purposes a sukuk – Arabic for ‘investment certificate’ – is issued for the purpose of raising money for utilisation within a corporation or government entity.
Sukuks offer a higher return paid to the investor. This creates an additional choice within the investment market and enables investors to add a diversification component to their portfolio.
Eskom’s Funding Plan
The company’s latest strategy “requires sizeable funding that can provide diversification and longer tenors at reduced finance costs,” according to a request made by Eskom and posted on the National Treasury website.
“Eskom has assessed the viability of an innovative local-currency South African-based Sukuk funding solution that would enable Eskom to further develop its borrowing plan.”
Shariah-compliant bonds have been considered as a funding source for Eskom since around 2012, writes Bloomberg. The company said two years later that it would watch and wait to see what the South African government does with its sukuk debut as a barometer for future funding plans.
South Africa sold $500 million of Shariah-compliant bonds in 2014 at a 3.9% profit rate, at the time its lowest-cost dollar bond yet, according to data compiled by Bloomberg.
Eskom invites companies to join in on the bond
Eskom’s proposal, issued on 24 June, has been inviting legal institutions and other companies to work with the power utility on the Sharia-compliant bond, which comes bundled-up with a government guarantee and a listing on the JSE.