Eskom bonds punished

Some investors are getting out of Eskom dollar bonds amid concern South Africa is taking too long to implement a turnaround plan and explain what it will do about the utility’s $35 billion of debt.

Yields on the struggling power company’s dollar bonds due 2025 climbed to a one-month high on Wednesday, even though the government’s R138 billion bailout has bought it some time to reorganise its finances. Besides concern over the debt load, investors want to see faster progress on operational and organisational changes meant to return the company to sustainability.

Plans mooted as far back as February to split Eskom into three operating units will take until the end of 2021 to be fully implemented. A new chief executive was supposed to be in place by the end of last month. And perhaps most troubling, the idea of selling some power plants and cutting the bloated work force has met fierce opposition from the ruling African National Congress’s labor union allies.

“The political will needs to be found to make the difficult decisions that are needed to set Eskom on a sustainable path,” said Olga Constantatos, a credit analyst at Cape-Town based Futuregrowth Asset Management, which oversees R185 billion, including Eskom bonds. “The time for urgent action is now.”

The lack of progress has already seen Moody’s Investors Service tone down its leniency on South Africa. The rating company assesses South Africa’s debt at Baa3, the lowest investment level, but changed its outlook to negative last week, giving South Africa possibly until February’s budget statement to lay out credible plans for the utility or risk a junk rating. The company cut Eskom’s stand-alone rating one step on Tuesday to B3, or six levels into junk.

Yields on Eskom’s 2025 dollar bonds have climbed 19 basis points in the past two days to 6.52%, still well below their December peak but up almost a percentage point since July. The government has repeatedly said investors won’t lose money in the reorganiSation of the company’s R450 billion of debt, most of which is guaranteed by the state.

Still, “investors are disappointed,” said Bronwyn Blood, a fixed-income portfolio manager at Granate Asset Management Ltd. in Cape Town. “There are still important questions that remain unanswered particularly regarding the debt restructuring and where existing creditors stand.”

An announcement on a new chief executive is expected within days along with changes to Eskom’s board, President Cyril Ramaphosa said in an interview on Wednesday. The utility has been without a permanent CEO since Phakamani Hadebe quit in July and the post has been temporarily filled by its chairman, Jabu Mabuza.

Any further financial support for Eskom would be in the form of government loans, and plans to lessen its debt load wouldn’t be announced until the operational problems have been fixed, Finance Minister Tito Mboweni said last week. That makes the operational restructuring even more urgent.

“Ultimately, uncertainty remains about Eskom’s financial viability and intentions to restructure its debt,” said Jones Gondo, a senior credit analyst at Nedbank Group. “The CEO appointment won’t change this. The candidate will be confronted with the same reality and the tough decisions incumbents have been unable to make and the same burden and constraints will now fall on the new CEO.”