SA yields rise, Eskom's fall as bailout talk grows

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Yields on Eskom’s dollar bonds traded near one-year lows while those on government debt jumped amid renewed speculation that the South African government may take over the cash-strapped electricity company’s debt.

Moody’s Investors Service now includes the power producer’s government-guaranteed debt in its assessment of the nation’s fiscal situation because the utility can’t service its obligations without the state’s backing, it said in an emailed report Wednesday.

While the government allocated Eskom a R69bn cash injection over the next three years in the February budget, another bailout - which may entail a swap of the company’s debt into government bonds - will probably take place in the second half of this year, said Peter Attard Montalto, the head of capital-markets research at Intellidex in Johannesburg.

The transfer of the producer’s credit risk to the sovereign "would de-lever the Eskom balance sheet markedly, which could be dangerous and would require conditionality to make it credible with investors and ensure Eskom didn’t become more profligate," he said. The cabinet will likely sign off the support plan in mid-June, he said.

Yields on Eskom’s $1 billion of securities due in August 2023 are near the lowest since April 2018, at 6.48%. Rates on bonds maturing next year, 2025 and 2028 are flat Friday after having fallen all week. The 2021 debt has tightened the most among all the producer’s dollar notes this year, suggesting that investors are comfortable holding relatively short-term securities in the expectation that money will be found to avoid a default.

Yields on benchmark 2026 government debt climbed 6 basis points to 8.5%, while the rand weakened 0.6% by 13:16 in Johannesburg. The cost of insuring the sovereign’s debt against default using credit-default swaps climbed 5 basis points to 195.

Another bail out imminent?

Not all investors agree that another bailout is imminent. A debt swap is unlikely this year, said Richard Segal, a London-based senior emerging markets analyst at Manulife Asset Management. “There are other priorities and Eskom can tap existing guarantees first” for financing, he said.

Taking on Eskom’s debt would undermine the country’s credit profile, something the Treasury won’t risk in the immediate future, said Darias Jonker, a London-based director at Eurasia Group. The government would probably opt for a further liquidity injection, he said.

Debt at Eskom, which supplies almost all the power used in SA, is approaching R500bn, according to data compiled by Bloomberg. That’s about 10% of the country’s GDP, and is up from about R370bn a year ago. While the utility declined to comment on the current number, Chief Executive Officer Phakamani Hadebe last month put total debt at about R450bn.

President Cyril Ramaphosa said this week that Eskom is "too big to fail", suggesting the sovereign would step in if the need arises, said Jones Gondo, a senior credit analyst at Nedbank in Johannesburg.

"Eskom’s bonds probably reacted to the statement of support," Gondo said. "Remember, an Eskom investor’s priority is to be reasonably certain of full repayment when payments are due, even if it is not necessarily a great picture for the country."

Eskom is working with the government "to find and implement a sustainable financial solution", the company said via its media desk in response to Bloomberg’s emailed questions. In the meantime it would use the existing liquidity injection to service debt, it said.

The National Treasury didn’t immediately respond to emails and calls seeking comment. Engagements are continuing between the Treasury, Department of Public Enterprises and Eskom about the utility’s long-term financial sustainability, Finance Minister Tito Mboweni said in a report to Parliament in April, after the government was forced to pay R5bn in emergency funds so the state-based utility could meet obligations.

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