Sure to Shake Eskom Bondholders: It May Be `Too Big to Save'

(Bloomberg) -- While South African President Cyril Ramaphosa says power utility Eskom Holdings SOC Ltd. is considered too big to fail, S&P Global Ratings has a different view: it could be too big to support.

The government’s commitment to provide Eskom 23 billion rand ($1.5 billion) annually for three years is insufficient on its own to improve the company’s liquidity outlook and credit rating, Engineering News reported, citing S&P Global Ratings Director Ravi Bhatia. That will act as a constraint on fiscal consolidation, raising the country’s overall debt burden, it cited Bhatia as saying.

That may further rattle investors who have been steady sellers of the company’s dollar bonds: yields on 2021 securities have been rising for nine straight days, the longest streak since October 2015, adding 95 basis points to a two-month high. At the same time, the cost of insuring South Africa’s sovereign debt against default has climbed above 200 basis points as traders consider the potential effect of Eskom’s crisis on state finances.

S&P’s comments highlighted “the enormity and cost of the task of restructuring Eskom into a more financially viable entity,” said Bronwyn Blood, a fixed-interest portfolio manager at Cape Town-based Granate Asset Management. “Eskom cannot continue in its current form, but the costs associated with restructuring it are enormous and are ones that the fiscus can hardly afford.”

South Africa’s state-owned power utility is straining under more than $30 billion of debt, more than half of which is guaranteed by the government. It isn’t selling enough electricity to cover its operating and borrowing costs. Yields on the company’s 2021 dollar bonds -- which do not carry a guarantee -- climbed eight basis points on Friday to 6.54%.

The yield premium of Eskom’s non-guaranteed bonds is widening

Eskom’s liquidity position is “exceptionally fragile,” and this is unlikely to change in the foreseeable future, Engineering News reported, citing Omega Collocott, a corporate-ratings director at S&P. Further bail-out options were being considered and an option would be to use the government’s 350 billion-rand debt-guarantee framework to directly assume repayments on behalf of Eskom, Collocott was cited as saying.

“Support for Eskom puts pressure on the government’s fiscal accounts,” S&P’s Bhatia said in an emailed response to questions from Bloomberg. “Directly assuming Eskom’s payments will add to the government’s already strained fiscal deficits, thereby likely worsening its fiscal metrics.”

Eskom declined to comment.

‘Unimaginable Demands’

In the midst of plans to restructure the business, Eskom’s board also needs to find a CEO to replace Phakamani Hadebe, who said he will step down at the end of July due to health reasons. “This role comes with unimaginable demands,” he said in a May 24 statement. In addition, a chief reorganization officer has yet to be appointed for the restructuring of the business.

The utility, which is expecting a consecutive annual loss for the financial year ending in March, said it usually announces the much-anticipated annual results in July, but hasn’t set a date.

“Eskom is like a black hole, sucking in what seems like an endless amount of funding and financial support,” said Mike van der Westhuizen, a portfolio manager at Citadel Holdings Ltd. in Johannesburg. “In its current form Eskom will almost certainly bring down the house as it relates to further fiscal slippage at national budget level if a turnaround strategy is not devised or at least announced soon.”

--With assistance from Ana Monteiro and Renee Bonorchis.

To contact the reporters on this story: Colleen Goko in Johannesburg at cgoko2@bloomberg.net;Paul Burkhardt in Johannesburg at pburkhardt@bloomberg.net

To contact the editors responsible for this story: Rene Vollgraaff at rvollgraaff@bloomberg.net, Robert Brand, Paul Richardson

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