Johannesburg - JPMorgan Chase & Co., the biggest arranger of corporate debt this year, raised Eskom’s debt to buy, saying the utility’s yields are attractive and betting its rating won’t be cut further.
“The extra yield of 1.5 percent that Eskom bonds offer over and above South African government bonds, combined with our fundamental belief that the South African government will support the company in almost all circumstances, compelled us to go overweight,” JPMorgan’s Johannesburg-based team said in an e-mail today. “We do not expect further adverse rating action from the agencies in the near term and hence the timing of our upgrade.”
CASH-FLOW GAP
Eskom is struggling to fill a R225 billion cash-flow gap after the energy regulator granted the company only half the annual tariff raises sought for the five years through 2018. Moody’s Investors Service reduced the utility’s rating to junk on Nov. 7, a day after cutting the sovereign. The country’s R20 billion rescue plan for Eskom, plagued by blackouts and delayed plant openings, is enough to preserve its rating, Standard & Poor’s said on Nov. 11.
The utility started rolling power blackouts on Nov. 2 after a coal silo collapsed at its second-largest plant, Majuba, and it said today there are cracks in other storage facilities at the station.
“Eskom continues to have challenges and we do not expect much improvement anytime soon,” JPMorgan said. “The government’s promised equity infusion of about R20 billion is a welcome relief, though only a temporary solution in our view.”
YIELD DIFFERENCE
Yields on Eskom’s dollar bonds due in January 2021 were 5.12 percent at 12:04 p.m. in Johannesburg, while the government’s greenback debt maturing in May 2022 was at 3.93 percent, a difference of 1.19 percentage points. The yield premium of the utility’s rand bonds due in December 2018 over similar-maturity government debt in the local currency is 2.53 percentage points.
Eskom’s delays in commissioning new capacity, the increasing costs of primary energy, aging plants and “bloated staff costs are some of the issues that concern us as bond investors,” JPMorgan said.
Bloomberg