Fight to Keep Lights On No Turn-Off for Eskom Debt Investors

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Forget that South Africa’s state power utility is struggling to keep the lights on and that its profit has fallen. In the world of sovereign-linked bonds, its debt is attractive, Jyske Bank A/S said.

Eskom Holdings SOC Ltd.’s February 2025 dollar bonds trade 254 basis points above similar-dated South African government debt, four points off the biggest premium since April, which makes them “quite cheap,” said Rune Hejrskov, a money manager at Silkeborg, Denmark-based Jyske, which oversees $17.9 billion of assets, including Eskom bonds.

“That’s a buying opportunity,” he said by phone Aug. 13. “It’s still one of the top names for quasi-bonds. Eskom is just about the only way for people who want to invest in South Africa without investing in government bonds.”

Jyske’s optimism comes even as the utility that provides 95 percent of power to Africa’s most-industrialized economy said profit fell 49 percent in its last financial year. It’s also battling to fill a revenue shortfall of 225 billion rand ($17.6 billion) for the five years through 2018, the result of the energy regulator’s decision to grant the company half of the annual average tariff increase of 16 percent sought for the period.

Biggest Plants

Eskom narrowed the gap to 191 billion rand through cost-cutting, and plans to save a further 61.9 billion rand. It’s asked the regulator for increases of more than the allowed 8 percent starting April 2016 so it can recoup 38 billion rand of costs incurred in the year to March 2014, acting Chairman Ben Ngubane said in an annual report released Aug. 11.

The utility is expanding generating capacity, including building what will be Africa’s two biggest coal-fired power plants, as its aging fleet is plagued by breakdowns. The new facilities are running years behind schedule because of strikes and faulty work, resulting in planned blackouts almost every second day on average this year.

While its latest capital-spending budget is 293 billion rand through March 2020, it has approval to borrow 237 billion rand.

The government pledged to convert a 60 billion-rand loan to Eskom into equity and promised a 23 billion-rand cash injection -- 10 billion rand of which has already been paid. More state help will follow, Jyske’s Hejrskov said.

More Money

“They do need more money and they’ll get it, because the country can’t run without Eskom being functional,” he said.

Uncertainties over Eskom’s liquidity won’t deter demand for its government-guaranteed, rand-denominated debt, said Abri du Plessis, a Cape Town-based fund manager at Gryphon Asset Management Pty Ltd., which holds Eskom bonds.

“There aren’t many institutions issuing debt at the moment,” Du Plessis said. “The demand will be there when Eskom comes to the market.”

The electricity producer will borrow 55.3 billion rand this year, 17 billion rand of which will be offered to foreign investors, it said Aug. 10.

“Eskom has already secured 25 billion rand” of that, said Khulu Phasiwe, a spokesman. “We’re confident that we will be able to raise the funding that we require to complete our capital-investment program.”

Yields on Eskom’s 2025 bonds have risen 33 basis points this month to 7.29 percent, the highest since Feb. 17. Dollar debt of emerging-market utilities increased 1 basis points to an average 4.77 percent, JPMorgan Chase & Co. indexes show.

There are no guarantees that the regulator will grant Eskom tariffs increases to cover higher expenses and the build program, Elena Ilkova, a credit analyst at Rand Merchant Bank in Johannesburg, said by phone. Electricity charges that don’t match costs will raise Eskom’s debt fees, she said.

“The fundamental question is whether tariffs will be cost-reflective,” Ilkova said. “You can raise the debt, but there’s a price to be paid.”

Eskom is on the right track to solve its funding problems and is getting adequate support from the government, said Richard Klotnick, a fixed-income portfolio manager at Momentum Asset Management in Johannesburg.

“The government has realized the extent of the crisis and is moving in the right direction,” Klotnick said. “It’s just whether they’ll get the timing right or not.”

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