Eskom's Rally on Cyril Ramaphosa's Pledge Leaves Some Uneasy

(Bloomberg) -- Some investors in Eskom Holdings SOC Ltd.’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 Feb. 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 Holdings Ltd. 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 Group Inc. as the biggest threat to the nation’s economy, is approaching 500 billion rand ($35 billion), according to data compiled by Bloomberg from public records, including bonds and issued loans. It’s up from about 370 billion rand a year ago.

Bailout Ideas

While the government allocated Eskom a 69 billion-rand ($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.

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 stabilize.

“Eskom is not profitable with a high debt load and needs a lot of investment to maintain operations,” said Eugene Choi, portfolio manager at Pictet Asset Management. “It is part of our investible 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.

To contact the reporter on this story: Colleen Goko in Johannesburg at cgoko2@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Srinivasan Sivabalan

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