Eskom’s bondholders signal caution ahead of debt talks

As Eskom prepares to talk to investors about plans to address a multi-billion dollar debt load, the performance of the company’s bonds already suggests some skepticism from bondholders.

The yield premium of Eskom’s 2028 dollar bonds without a government guarantee over those with state backing has widened almost 50 basis points since the beginning of October to the most in four months. The state-owned electricity company has R402 billion ($26 billion) of debt, of which about 70% is guaranteed by the government.

Finance Minister Enoch Godongwana said earlier this month the power utility would seek bondholder approval for a plan to spread its debt between three new corporate entities. Rich nations have also pledged to provide billions of dollars in funding to Eskom to help South Africa reduce its dependence on coal.

The three new entities will oversee transmission, generation and distribution. A transmission company has already been established and registered and Eskom has a December 31 deadline to complete the legal separation of the entity, National Treasury said.

Organisational unbundling could be the start of a process to modernize operations, but won’t solve the debt problems, said Guido Chamorro, co-head emerging-market hard-currency debt at Pictet Assets Management Ltd.

“As a stand-alone credit, Eskom does not have a sustainable financial profile,” Chamorrow said. “It simply has too much debt and remains reliant on government aid to pay interest on its debt.”

Okan Akin, a credit analyst at AllianceBernstein in London said while it was encouraging to see the green-finance pledges, more needed to be done to address underlying problems such as viable tariffs and payment arrears at municipalities, as part of any proposal to bondholders.

“They need to have a strong and robust proposal and not ignore the real fundamental issues,” he said.