Standard & Poor’s (S&P) decision not to cut Eskom to junk has given some relief to holders of the state-owned power utility’s bonds.
Yields on its debt due in August 2023 fell 41 basis points to 5.48 percent since November 11, when S&P decided to hold Eskom’s rating. That compares with a three basis-point drop in dollar debt of emerging market utilities, JPMorgan Chase indices show.
Eskom, which is unable to meet power demand by Africa’s second-biggest economy, escaped a cut to junk by S&P last month when the ratings company said the government’s R20 billion rescue plan was enough to preserve its BBB- rating for now. The utility’s assessment has a negative outlook, meaning it still has a 30 percent chance of being reduced by S&P, which cites the risk of the package failing.
“The government plan is certainly a positive,” Elena Ilkova, a credit analyst at Rand Merchant Bank, said.
“S&P is willing to wait and see which is a very strong message for the time being. Eskom has bought itself a bit of time.”
South Africa would raise funds for the plan by selling shares in listed companies, stakes in state-owned entities and real estate, Finance Minister Nhlanhla Nene said in his medium-term budget policy statement in October.
Eskom, which provides about 95 percent of South Africa’s power, is struggling to fill a R225bn cash-flow gap after the energy regulator granted the company only half the average percentage increase in annual tariffs sought for the five years to 2018.
The power supplier needed to cap cost increases at 10 percent a year, complete new power plants on time and win a total 40 percent tariff increase from the regulator in the three years to 2018, S&P said last month, when it held Eskom at its lowest investment grade.
Moody’s Investors Service cut the company to junk on November 7, a day after cutting the sovereign. Even so, Eskom’s dollar bonds due in August 2023 have outperformed those of other emerging market utilities that also carry a rating of BBB-, such as Power Grid of India and Israel Electric since November 11.
Spreads “began narrowing slightly around the time that S&P affirmed Eskom’s global-scale rating and removed its rating from CreditWatch negative”, Standard Bank Group analysts led by Robyn MacLennan wrote in a note dated November 28, referring to a status that reflects a 50 percent change of a cut within 90 days by S&P. “Eskom’s offshore bonds appear to offer relative value to peers.”
JPMorgan, the biggest arranger of corporate debt this year, recommended last month that investors buy the bonds. “Outside Russia, it’s difficult to find bonds with similar credit ratings and 100 percent sovereign ownership that are yielding 5.2 percent to 5.7 percent,” JPMorgan’s Johannesburg-based team said last month.
South African households and businesses have had to endure managed blackouts this year as delays in new plant openings strain Eskom’s ageing fleet of facilities that is becoming more susceptible to breakdowns. IIkova said the lower oil price, down 35 percent since June 30, was a “very big positive” for Eskom because it lowered the cost of diesel-powered open-cycle gas turbines, which operated in times of shortages.
Bloomberg