Eskom bondholders take comfort from guarantee amid rescue talks
JOHANNESBURG: Bondholders of South Africa’s state-owned electricity company are watching the latest round of rescue talks from a distance.
Yields suggest they’re confident their money is safe, whether or not the discussions result in a sustainable solution for Eskom Holdings SOC Ltd’s Us$32bil debt pile.
Eskom’s risk premium over South African sovereign debt narrowed to a 19-month low last week and remained near that level even amid global bond turmoil. Investors including T Rowe Price International Ltd, Insight Investment Management and Aberdeen Standard Investments said they haven’t been approached about the debt plan, but believed a solution could be reached.
Nedbank Group Ltd is involved in discussions to restructure the debt, Bloomberg reported earlier this month. One of the options is to transfer at least 100 billion rand (Us$6.7bil) of debt to a special-purpose vehicle that would be overseen by the Public Investment Corp, Africa’s biggest fund manager that supervises government pensions, according to people familiar with the discussions.
“There
is slightly more credibility toward
where they want to move in terms of debt and becoming a self-sustaining entity,” said Willem Visser, a London-based credit analyst at T Rowe Price, which holds Eskom bonds.
“Things are moving in the right direction.
The trajectory is correct in terms of our comfort level that at the end of all this we will get paid.”
Eskom, described by Goldman Sachs Group Inc as the biggest threat to the South African economy, has become mired in debt as a result of overspending on projects. The utility can’t meet its costs and is subjecting the country to intermittent power outages as a result of inadequate maintenance at its ageing fleet of coal-fired power plants.
About two-thirds of the company’s bonds are backed by an explicit government guarantee that was designed also to improve the position of holders of the non-guaranteed securities.
Under the terms of the agreement, the government is obliged to step in when Eskom anticipates payment pressure, to prevent a default. It also rules out cross-defaults.
That leaves holders of the non-guaranteed debt in a secure position, according to GAM Holdings. It shows in the yield spreads: the premium investors demand to hold the company’s 2028 dollar bonds without a government guarantee rather than those with state backing is at its lowest in two years.
“The debt issue is clearly a problem, but I find it hard to believe eurobond holders would take the hit given the guarantee structure,” said Richard Briggs, a London-based money manager at GAM Holdings, which owns Eskom bonds.— Bloomberg