Eskom Holdings Ltd. is encouraged by the demand for its $1.75 billion bond sale, the first dollar- denominated notes sold by the South African power utility, and will take the success “forward” as it assesses future funding, Chief Executive Officer Brian Dames said.
Demand for the bonds offered by the company, Africa’s biggest power supplier, exceeded demand by more than two-and-a- half times.
“We needed to see how this would go and it’s very important that we have done this and that it’s been successful,” he said in an interview from Johannesburg yesterday. “We’ll take this forward in a responsible and prudent manner.”
Eskom is spending 485 billion rand ($69 billion) over seven years to plug a capacity shortfall that shut mines, factories and blacked out homes in 2008. The state-owned company supplies about 95 percent of South Africa’s electricity, powering BHP Billiton Ltd.’s aluminum smelters, Xstrata Plc’s ferrochrome smelters and AngloGold Ashanti Ltd.’s mines. It’s also the main power supplier to platinum operations in the country, the world’s largest supplier of the metal.
“Going forward they’ll definitely tap the international market again,” Deon van Zyl, head of fixed interest investment at Metropolitan Asset Managers, said from Cape Town.
The 10-year bonds were priced to yield 250 basis points more than comparable U.S. Treasuries, Johannesburg-based Eskom said. Ten-year Treasuries yielded 3.45 percent in New York as of 5:41 p.m. Johannesburg time. The yield on Eskom’s dollar bonds puts the securities on par with those of Brazil’s national energy company Centrais Eletricas Brasileiras SA, whose 2019 dollar-denominated debt yielded 5.01 percent, according to data compiled by Bloomberg.
“Based on this, I should certainly encourage them” to issue more, Michael Jansen van Rensburg, head of fixed income trading at Cape Town-based FutureGrowth Asset Management, said by phone. “It’s a lot quicker, and it’s an easier mechanism.”
Direct loans can have more demanding conditions, he said.
“The proceeds will be used to fund our committed capital expansion program and so help to keep the lights on for all South Africans,” Dames said. The offering is expected to close on Jan. 26 and an application has been made for the senior unsecured and unguaranteed 5.75 percent notes to be listed on the Luxembourg Stock Exchange, Eskom said.
The extent of the support for the first issue “suggests that it’s certainly a possible avenue for funding going forward,” Simon Howie, credit portfolio manager at Investec Asset Management, said from Cape Town.
Not Regular Visitor
Eskom last sold international bonds in February 2006 when it issued 500 million euros ($675 million) of 4 percent bonds due 2013, according to data compiled by Bloomberg. Eskom’s debt is rated BBB+ by Standard & Poor’s, the firm’s third-lowest investment-grade ranking, and equal to South Africa’s sovereign rating.
While Eskom intends to continue tapping local and international markets for funds, Eskom can’t say “at this stage” when it will issue more international bonds, Chief Financial Officer Paul O’Flaherty said.
While demand for its first dollar bond issue was “excellent,” Eskom will tap international markets “cautiously,” O’Flaherty said in an interview. “We won’t be a regular visitor offshore to raise that kind of money.” The sale is about equal to the total that Eskom raises through issues in South Africa annually, he said.
Eskom is looking to raise about 300 billion rand for its expansion program. Of that, about 200 billion has been secured or identified, O’Flaherty said. Eskom is looking to raise 90 billion rand through bond issues over seven years, he said.
“Government’s support has lowered Eskom’s risk profile and provided the necessary foundation for a return to Eskom being able to raise funding off its own balance sheet,” the Ministry of Public Enterprises said in an e-mailed statement. The government gave Eskom a 60 billion rand subordinated loan that has been drawn down over the past three years and increased a guarantee facility to 350 billion rand last year.
While Eskom may consider more international bond issues, “they need to be a little bit careful in building their international base too much,” George Glynos, managing director of Econometrix Treasury Management, said from Johannesburg. “The danger of exposing yourself too much to foreign interest is that, in times of rand weakness, it can impact quite negatively on interest payments and coupon payments.”
The rand has gained 33 percent against the dollar since the end of 2008 and traded at 7.0989 per dollar as of 5.43 p.m. in Johannesburg.
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