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Eskom’s breakout rally on Ramaphosa’s pledge leaves some uneasy

Citing the power utility’s situation as ‘extremely delicate’.

Some investors in Eskom’s bonds are taking President Cyril Ramaphosa at his word — that South Africa won’t allow the state-owned entity to fail.

Yields on the company’s 2021 dollar-denominated bonds have declined every day since May 14, and were down 29 basis points on Monday at 5.85%, the lowest since February 26. And its 2028 notes are among the top performers in the Bloomberg Barclays index for emerging-market dollar debt, which has 1 934 members.

Other investors say the optimism is premature.

“The situation at Eskom is still extremely delicate,” said Mike van der Westhuizen, portfolio manager at Citadel in Johannesburg. “There are still tough decisions that need to be made, and they need to be made urgently. Until a realistic and credible turnaround strategy, with timelines, is announced, we remain very cautious on Eskom, as well as South Africa sovereign-credit risk.”

The embattled utility’s debt burden, described by Goldman Sachs as the biggest threat to the nation’s economy, is approaching R500 billion ($35 billion), according to data compiled by Bloomberg from public records, including bonds and issued loans. It’s up from about R370 billion a year ago.

Bailout ideas

While the government allocated Eskom a R69 billion ($4.8 billion) cash injection over the next three years in the February budget, another bailout that may entail a swap of the company’s debt into government bonds may be on the cards. A further option under consideration is the creation of a special-purpose vehicle, owned by National Treasury, that would take over a large portion of Eskom’s debt and would have the advantage of being able to raise blended finance.

Read: SA reportedly considers special purpose vehicle for Eskom

Moody’s Investors Service, S&P Ratings and Fitch all rate the company as junk.

Even holders of the bonds remain wary about the company’s ability to stabilise.

“Eskom is not profitable with a high debt load and needs a lot of investments to maintain operation,” said Eugene Choi, portfolio manager at Pictet Asset Management. “It is part of our investable universe and we do hold it in our portfolios. That said, it’s not a name that we like.”

Pictect has holdings in all of Eskom’s dollar-debt. Its biggest holding is 1.77% of the utility’s $500m of notes maturing in August 2028. Pictet’s total holding across all the securities is 0.12%.

Citadel’s holdings, at 0.01%, are in rand-denominated debt due in 2026, 2033 and 2042.

© 2019 Bloomberg L.P
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Special purpose vehicle, government bonds, loans from China, in the end the taxpayer is going to foot the bill. Stop trying to polish a turd, we are not stupid.

End of comments.

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