Eskom’s risk premium eases as Treasury offers bailout conditions

Credit default swaps for Eskom, South Africa’s state-owned power company, are trading near the cheapest level in almost three years relative to the sovereign risk after the Treasury published proposed conditions for funds to bail out the utility.

That suggests investors are comfortable a turnaround plan for the debt-ridden company, which President Cyril Ramaphosa says will be presented to cabinet shortly, will include a sustainable framework to deal with its $30 billion of debt. The government has said it won’t allow Eskom to fail or bondholders to take a haircut.

Read: Eskom to get R59bn, but T&Cs are onerous

“It’s about 10 years too late, but better than nothing,” said Rashaad Tayob, a money manager at Abax Investments in Cape Town. “It’s positive that there will be oversight on Eskom’s capex, and a requirement that they must work to recover debtors in arrears. But nothing on energy and staff costs, so we must wait for the special paper/white paper to understand the long term plan to fix Eskom.”

Eskom, which supplies about 95% of South Africa’s electricity, has been granted R128 billion of state bailouts over the next three years to help it remain solvent.

Amounts of R26 billion and R33 billion will be allocated in portions to Eskom in the 2020 and 2021 financial years on dates determined by the finance minister, the Treasury said in a presentation on its website Wednesday.

The conditions offered include that Eskom publish separate financial statements for its generation, distribution and transmission units. Treasury will also require daily liquidity position updates and for no incentive bonus payouts to be made to executives in the years where equity support is provided.

“The market is taking comfort from the fact that there is increased government oversight,” said Bronwyn Blood, a fixed-interest portfolio manager at Granate Asset Management in Cape Town. “Conditions imposed on Eskom will ultimately allow for more certainty around repayment of debt, thus minimising the risk of default.”

Yields on Eskom’s dollar bonds due February 2025 fell 2 bps by 8:50 am in Johannesburg to 6.49%.

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