Kevin Crowley
ESKOM will be burdened with higher borrowing costs until the government gives clarity on its rescue package for the state-run power utility, according to Rand Merchant Bank.
The Treasury said on October 22 it planned to inject at least R20 billion into Eskom and has yet to announce full details. That creates uncertainty, according to Elena Ilkova, a Johannesburg-based analyst at RMB, a unit of FirstRand.
“The negative sentiment towards Eskom persists,” she said. “Spreads will continue to go up unless we have clarity on how the government will help.” Eskom, which supplies 95 percent of South Africa’s power, plans to sell at least three bonds this year as it grapples with a R225bn funding gap in the five years to March 2018.
While the utility remains investment grade at Standard & Poor’s and Fitch Ratings, Moody’s Investors Service cut its rating to junk on November 7, despite the government’s rescue plan.
The power utility is struggling to keep the lights on in Africa’s second-largest economy after the country failed to invest adequately in generation in the 20 years after the first democratic elections in 1994 even as the government expanded supply to an extra 7 million people.
Ageing fleet
There is a high risk of managed blackouts almost every weekday until April as the utility conducts maintenance on its ageing fleet of power plants, the company said on January 15.
The government would sell state assets and provide Eskom with a first cash injection of R10bn rand by June, Finance Minister Nhlanhla Nene said in Davos.
Investors will look for further details when Nene announces South Africa’s budget for the year through March 2016 on February 25.
Yields on Eskom’s $1bn (R11.38bn) of bonds due in August 2023 have risen 13 basis points to 6.25 percent since the government first announced plans for a package on September 14.
While Eskom was confident it would be able to raise money in the debt markets, it would probably be more costly, said Caroline Henry, the company’s senior manager for Treasury. “We will be able to do the transactions successfully,” she said. “It’ll be more costly, and we’d have to do a lot more than we normally have.”
Investor meetings
The company has mandated Deutsche Bank, Rand Merchant Bank and Standard Bank to organise a series of meetings with fixed-income investors in the US and Europe from today to February 3, according to a person familiar with the matter who isn’t authorised to speak publicly and asked not to be identified.
Eskom didn’t reply to an e-mailed request for comment on Thursday.
Power cuts and the accompanying reduction in revenue was a “major issue” for bond investors, Ilkova said. “Eskom’s financial position is already quite tricky.” – Bloomberg