South Africa\u2019s pledge not to let Eskom Holdings SOC Ltd fail is enticing yield-starved investors to the company\u2019s dollar debt.<\/p>\n
Bondholders from New York to Seoul say they\u2019re happy to hold onto the power company\u2019s securities – and in some cases add to their holdings – because of their extra return relative to the country\u2019s sovereign debt.<\/p>\n
The government\u2019s assurance that it won\u2019t let the company default, effectively guaranteeing the debt, allows investors to play that spread without too much risk even though Eskom isn\u2019t generating enough cash to service its own liabilities.<\/p>\n
\u201cState support for the company remains very solid and they continue to prioritize the repayment of the company\u2019s debt,\u201d said Paul Greer, a London-based money manager at Fidelity International, which oversees 243 billion pounds ($295 billion), including Eskom bonds.<\/p>\n
\u201cThe valuations of Eskom debt remain on the cheap side of fair value.\u201d<\/p>\n
Yields on Eskom\u2019s unsecured 2028 dollar bonds have dropped 250 basis points this year even after it reported a record loss in July. That\u2019s still 250 basis points more than South Africa\u2019s 10-year sovereign debt.<\/p>\n
The utility, which generates about 95% of the South Africa\u2019s electricity, has amassed net debt of more than $30 billion and is relying on a R128 billion ($8.4 billion) bailout over the next three fiscal years to stay afloat.<\/p>\n
The government has proposed splitting Eskom into three operating units to help cut costs, but the plan is facing resistance from labor unions opposed to job losses.<\/p>\n
While president Cyril Ramaphosa has said Eskom is \u201ctoo big to fail,\u201d the government has had to increase borrowing too fund the bailout, raising the risk of a credit downgrade to junk.<\/p>\n
\u201cIt ultimately comes down to government support,\u201d said Jinwoo Kim, a credit analyst at Mirae Asset Global Investments Co in Seoul.<\/p>\n
\u201cRamaphosa is clearly expressing he would not give up on Eskom. Any investor holding Eskom bonds is seeing there is higher probability that the government will save the company, since the company is just too important for its economy.\u201d<\/p>\n
About 70% of Eskom\u2019s R260 billion of bonds are guaranteed by the state.<\/p>\n
The rest are unsecured, but there\u2019s too much at stake for the government to put bondholders in jeopardy, said Shamaila Khan, director of emerging-market debt at AllianceBernstein in New York, which holds Eskom bonds, according to data compiled by Bloomberg.<\/p>\n
\u2018Strong Incentives\u2019<\/strong><\/p>\n \u201cA key driver of performance going forward will be the restructuring proposal,\u201d Khan said. While it\u2019s not clear how that would affect bondholders, \u201cthe government has strong incentives to structure it in a way that it does not damage bondholder interests,\u201d she said.<\/p>\n Not all investors are convinced. Eskom\u2019s turnaround may still be a long way off given political sensitivities around the restructuring, said Guido Chamorro, co-head of emerging-market hard-currency debt at Pictet Asset Management Ltd in London, which reduced its holdings of Eskom debt in May, according to data compiled by Bloomberg.<\/p>\n \u201cWe still hold some hope that the government will be able to address some of these issues, so we are ok having a neutral position,\u201d Chamorro said.<\/p>\n \u201cBut we haven\u2019t seen enough signs to have conviction to move to a large overweight position.\u201d<\/p>\n For others, though, it\u2019s too good a deal to pass up. Fuh Hwa Investment Trust in Taiwan has recently accumulated Eskom bonds, betting there won\u2019t be a debt restructuring even as the government reorganizes the company\u2019s operations.<\/p>\n \u201cWe know Eskom has lots of problems and inefficiencies, but we also know how important it is for the whole economy,\u201d said Jasmine Wu, who oversees the emerging-market portfolio at Fuh Hwa.<\/p>\n \u201cSo we don\u2019t expect a restructuring of the debt and instead we believe the sovereign will do all it can to support Eskom, even if the result is a sovereign downgrade.\u201d<\/p>\n
\n