Eskom is proving to be a big winner for bondholders

Eskom is not very good at keeping the lights on, but it is providing excellent profits for bondholders.

The state-owned utility’s dollar bonds due in 2028 — which do not have an explicit government guarantee — have handed investors a total return of 10% this year, more than three times that of the emerging-market benchmark. Securities due in 2025 and 2027 are also among the best performers in the 2,100member Bloomberg emerging markets hard currency aggregate index.

Bondholders are confident the National Treasury will make good any debts Eskom cannot pay — even those it does not backstop — meaning the bonds offer a yield pickup over the sovereign, without additional risk. They are also betting SA will pay a premium when it takes over as much as twothirds of the company’s debt later this year, a deal that may be announced in the annual budget on February 22.

“We would encourage investors to add ahead of the February budget announcement in which the government will provide details on Eskom debt assumption,” Zafar Nazim, a credit analyst at JPMorgan Chase Bank, said in a note to clients.

The company added Eskom bonds at the end of last year, according to filings data compiled by Bloomberg.

“Eskom should now be considered an extension of the sovereign, and bonds should trade as such,” Nazim said.

Most emerging-market debt is having a banner start to the year amid bets the US Federal Reserve will slow or halt interest rate increases and China’s reopening will mitigate a slowdown in global growth. But still Eskom’s notes have outperformed.

Yields on Eskom dollar securities due in 2028 have dropped 220 basis points since the start of the year to 9.30% on Wednesday. That is a premium of more than 300 basis points above similar-maturity SA government dollar notes. Yields on 2025 securities have plummeted 297 basis points to 9.21%, offering a spread of nearly 400 basis points.

About 80% of Eskom’s bonds come with an explicit government guarantee, and President Cyril Ramaphosa has said the company is “too big to fail ”— implying that the state would back the company if it ran into any troubles. The state is considering a takeover of some of its $22.8bn in liabilities as it seeks to restructure the utility and restore financial sustainability.

Some investors are steering clear, though. Eskom’s challenges are not just financial, and the hurdles to overcoming them are steep, said Manuel Mondia, a Zurich-based analyst at Aquila Asset Management.

The power company’s troubles have led to 13 consecutive months of rolling power cuts, leaving some areas without electricity for as much as 10 hours a day. The cash-strapped utility already relies on government support to run its operations and service its debt.

Goldman Sachs has described Eskom as the biggest threat to Africa’s most industrialised economy.

The Reserve Bank cut its forecast for economic growth this year to 0.3%, from 1.1% previously, citing the energy crisis, with governor Lesetja Kganyago saying the blackouts will cut an estimated 2 percentage points off output this year.

Transferring Eskom’s debt to the state would require modifications to bond agreements, a complex and uncertain process needing approval from holders of the securities, said Mondia.

Repeated cash injections have done little to ease operational and organisational problems, with CEO André de Ruyter announcing his resignation in December amid allegations that an attempt had been made to poison him.

“We got rid of our exposure as the yield attached to the issuer was relatively low when you think of the amount of issues they need to face, independently of the government support,” Mondia said. “The news flow including failures at plants and accusations of attempted murder raised red flags which pushed us out of the position.”

But Nazim said such concerns do not preclude an extended rally, with a call for non-guaranteed 2028 bonds to trade no more than 150 basis points higher than of the sovereign. “Creditors should not get too hung up on record rolling blackouts and the resignation of the company’s well-respected CEO,” he said.

“Creditors’ fortunes and the company’s credit profile are largely tied to tariff decisions and the government’s financial support. We believe both factors are moving in the right direction.”