Eskom bonds are trading like there's a viable turnaround

There’s been enough bad news about South Africa’s state-owned electricity company in recent months to rattle the hardiest bond investor. Or so you’d think.

In fact, Eskom's bonds are trading as if its troubles are over.

The premium investors demand to hold the company’s 10-year dollar bonds rather than US Treasuries dropped this week to the lowest since the securities were issued in August. That suggests traders are bullish about a much-anticipated rescue plan for the utility, deemed “too big to fail” by the World Bank.

Eskom said on Monday it expects a loss of around R20 billion for the year through March as coal and maintenance costs increased. The government is reviewing turnaround plans, which may include recapitalisation and unbundling.

President Cyril Ramaphosa, who has previously poured cold water on Eskom’s proposal that the government takes over some of its debt, may reveal the outlines of this strategy in his state-of-the-nation speech on Thursday.

“A cash injection from the central-government budget to Eskom would ease funding pressures on the utility,” Bank of America Merrill Lynch analysts including Ferhan Salman said in a report. “We think such an allocation, conditional on a restructuring plan, would be Eskom positive. It would also be positive for the fiscus as it would reduce risks stemming from contingent liabilities.”

Eskom has about R419 billion in debt, of which R260 billion is guaranteed by the government, a potential liability cited by rating companies as a credit negative for the sovereign. With a cash injection, Eskom would cover its funding gap for the next three years without needing further government guarantees, the BoA ML analysts said.

The company said last week it had secured about 95% of its R72 billion funding needs for this year, and 30% of next year’s requirement.

Eskom’s 10-year dollar spread over US Treasuries was little changed at 317 basis points on Tuesday. The premium has narrowed almost 100 basis points since the beginning of January.

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