Eskom bondholders signal alarm as Ukraine war boosts fuel costs

The surge in oil prices is raising alarms for bondholders of South Africa’s state-owned electricity company, Eskom Holdings SOC Ltd.

The premium investors demand to hold Eskom’s 2028 dollar bonds rather than similar-maturity US Treasuries has widened more than 100 basis points since the beginning of February to 711, a 15-month high. And the cost of insuring the utility’s dollar debt against default for five years jumped 15 basis points this month to the highest since April.

Eskom started rotational power cuts on Monday for the first time in four weeks after breakdowns at multiple generating units. It’s been using diesel-fueled turbines as an emergency measure and is concerned about cost overruns given the recent spike in crude prices, according to Chief Financial Officer Calib Cassim.

The utility could “get to a point where we just don’t have the funds” to run the emergency units, Cassim said in a virtual briefing on Tuesday. Eskom is “really concerned” about the impact the war in Ukraine will have on coal and fuel prices, Chief Operating Officer Jan Oberholzer said in the same briefing.

Rising fuel costs will complicate Eskom’s plan to cut debt and reduce carbon emissions. The company, which supplies almost all of South Africa’s power, has R392 billion ($26 billion) of debt. The utility has said the liabilities need to be cut to R200 billion for it to be sustainable and accept support pledged by rich nations to help reduce South Africa’s dependence on coal.