Eskom’s bond yields improve as installed power capacity ticks up

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Kevin Crowley

Eskom is returning to favour with bond investors as the utility prepares to add power capacity after plant-construction delays, strikes and near-blackouts.

The yield on Eskom’s $1 billion (R10.8bn) debt due in August 2023 fell 8 basis points this year to 6.38 percent on Friday, the lowest since November 1 last year. The premium between the rate and the average yield for emerging-market utility dollar debt has narrowed 22 basis points since November 21, two days after it declared a power emergency, JPMorgan Chase indices show.

Eskom, which generates 95 percent of South Africa’s electricity, has started buying renewable energy from independent producers and is completing its maintenance plans, boosting generated capacity to a four-month high. The improvements are helping to lower borrowing costs and may ease a R191bn funding shortfall over the next four years.

“The fact that the lights have stayed on is positive for investors,” said Elena Ilkova, a credit analyst at Rand Merchant Bank. “There are still unresolved issues which the government has to deal with but for the time being Eskom is about as stable as it could be.”

Eskom had added capacity of 638 megawatts of power generated from renewable sources since September last year, spokesman Andrew Etzinger said yesterday. That has boosted installed capacity by 1.5 percent to 42 538MW.

Production performance at Eskom’s existing plants had also improved, he said. That resulted in the generated capacity reaching 34 200MW on Monday, the second-highest since September 13.

Eskom is building what will be the world’s third- and fourth-biggest coal-fired power plants, Kusile and Medupi, which are scheduled for completion in the second half of this year and 2015, respectively.

Medupi, which will have capacity of 4 800MW, was originally scheduled to be completed by the end of last year but has been delayed by labour strikes and contractors missing deadlines.

Eskom’s dollar debt is rated BBB+ by Fitch Ratings, its third-lowest investment grade. Without state guarantees, the rating would be B, the fifth-highest junk level, Fitch said.

The bonds’ performance would depend on investors’ views of South Africa as a country to invest in rather than the company’s individual performance, said Abri du Plessis at Gryphon Asset Management.

“The fixed-income view is that the improvement in the company news is outweighed by negative perceptions surrounding the country, which guarantees the debt,” he said. – Bloomberg


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