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Eskom’s borrowing costs rise as investors query governance

Turmoil over finance minister weighs on power utility’s debt.

South Africa’s electricity company faces a $2 billion funding gap at a time when its borrowing costs are rising as investors have become wary of lending to state-owned enterprises because of allegations of poor governance and political meddling.

Yields on Eskom Holdings’s $1.25 billion of bonds due February 2025 jumped 42 basis points last week week after Futuregrowth Asset Management, the country’s biggest specialist fixed-income manager, said it wouldn’t offer loans or roll over existing debt for state companies until it was assured proper oversight has been restored. Denmark’s Jyske Bank said it’s cutting its holdings of Eskom’s bonds, while South African fund managers including Aeon Investment Management and Sasfin Asset Management said they supported Futuregrowth’s stance.

Finance Minister Pravin Gordhan is in disputes with Eskom, South African Airways and arms manufacturer Denel over questions ranging from the award of contracts to board appointments and spending plans. The Treasury chief is also the target of a police investigation into alleged irregularities at the tax authority, which some analysts have said are an attempt to replace him with a finance minister less insistent on good governance at state companies. 

“We’re not looking to add any South Africa risk at the moment, in light of the recent turmoil with Gordhan; we see potential for more downside risk in the short term,” said Kevin Daly, a portfolio manager at Aberdeen Asset Management in London, which sold some Eskom dollar bonds last month, according to data compiled by Bloomberg. Daly said government guarantees on some of the debt reduce the risk of holding it. “Ultimately, Eskom is too important to fail.”


Eskom's borrowing costs


The premium investors demand to hold Eskom’s 10-year dollar debt rather than US Treasuries has widened by 95 basis points in the past month to 5.37 percentage points as yields on the electricity company’s bonds reached a two-month high of 7.17%. The notes have lost 2.1% in the month, compared with the 1.3% average return of emerging-market corporate bonds, according to Bloomberg indexes.

The power utility, which serves the continent’s most-industrialised economy, said September 1 it has arranged 57% of its required R69 billion ($4.8 billion) funding for the year through March 2017. While “local asset managers provide considerable support to the funding of SOCs,” Eskom is confident it can raise the money it needs for the year even as some investors lose interest, chief financial officer Anoj Singh said in a statement.

The Treasury is battling Eskom over audits of coal-supply contracts with a company linked to the Gupta family, who are friends of President Jacob Zuma and in business with his son. Gordhan is in a stalemate with the national carrier, chaired by Dudu Myeni, who also heads Zuma’s charitable foundation. The unprofitable airline needs further loan guarantees from the government, which the finance minster has refused to sign.

“It’s fine for the SOEs to say ‘we don’t need the private sector, we’ll get our money from government,’ but the government also needs to borrow money,” said Piet Viljoen, chairman at Cape Town-based Regarding Capital Management, which oversees R7 billion. “Eskom’s financial liabilities are increasing rapidly and they’re struggling to generate revenue. It’s not a good place to be in.”

Lending Halt

Futuregrowth, with about $11.7 billion in assets, shelved plans to lend more than R1.8 billion to three state companies last week and said it won’t be extending more money until the enterprises show greater transparency on spending and asset sales, among other conditions.

The rand strengthened 0.72% against the dollar to 14.3831. The South African currency plunged 8.5% in seven days after Gordhan was summoned by a policy unit on August 22, further highlighting risks for foreign investors.

The biggest holder of Eskom’s rand debt is the Public Investment Corporation which oversees government pension funds. The company owns as much as 100% of some of Eskom’s rand bonds, according to data compiled by Bloomberg, leaving few to be traded in the market and making them less attractive for some investors.

“The tail risk here is a bit fat,” said Hakan Aksoy, a bond fund manager at Pioneer Investment Management in London, which oversaw the equivalent of about $250 billion at the end of March. “We like to keep the liquid government bonds more than the relatively illiquid quasi-sovereign debt for now.”

© 2016 Bloomberg

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