Eskom’s Borrowing Costs Rise as Investors Query Governance

  • Turmoil over S. African finance minister weighs on Eskom debt
  • Aberdeen sees potential for more short-term downside risk

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 SOC Ltd.’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 A/S said it’s cutting its holdings of Eskom’s bonds, while South African fund managers including Aeon Investment Management Ltd. and Sasfin Asset Management Ltd. said they supported Futuregrowth’s stance.

Finance Minister Pravin Gordhan is in disputes with Eskom, South African Airways and arms manufacturer Denel SOC Ltd. 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.”

The premium investors demand to hold Eskom’s 10-year dollar debt rather than U.S. 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 percent. The notes have lost 2.1 percent in the month, compared with the 1.3 percent average return of emerging-market corporate bonds, according to Bloomberg indexes.

The power utility, which serves the continent’s most-industrialized economy, said Sept. 1 it has arranged 57 percent of its required 69 billion rand ($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.

To read more about the conflict between the South African Treasury and state companies, click here

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 7 billion rand. “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 1.8 billion rand 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.

Yields on Eskom’s 2025 bonds fell 9 basis points to 7.05 percent by 8:54 a.m. in Johannesburg on Monday after increasing for three straight weeks. The rand strengthened 0.6 percent against the dollar to 14.4071. The South African currency plunged 8.5 percent in seven days after Gordhan was summoned by a policy unit on Aug. 22, further highlighting risks for foreign investors.

The biggest holder of Eskom’s rand debt is the Public Investment Corp. which oversees government pension funds. The company owns as much as 100 percent 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 Ltd. 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.”

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