*
Investors see that the state takes up to 2/3rds of Eskom’s debt
*
Details of the timing, size and mechanisms of the debt swap are unclear
*
Eskom’s international bonds in a steady climb from the beginning of 2023
JOHANNESBURG, Jan 26 (Reuters) – High hopes that the South African government will next month draw up plans to take on the majority of the debt owed by defunct state utility Eskom have lifted the country’s bonds company, and provided some relief to investors who are facing a long and uncertain situation. wait
South Africa has been struggling for years to overhaul its state power company which is plagued by corruption and mismanagement and reeling under a 400 billion rand ($23.3 billion) debt pile.
Meanwhile, Eskom’s implementation of increasingly intense cuts has hampered growth in Sub-Saharan Africa’s most industrialized economy.
Finance Minister Enoch Godongwana told Reuters last week that he was “sharpening his pencil” to provide details, so far scarce, for taking on between one and two-thirds of Eskom’s debt in -his presentation of the budget on February 22.
“The more the government is willing to take on debt, the better for Eskom, because it will help reduce interest costs, which is one of the big problems,” said Max Wolman, senior portfolio manager at Abrdn, who has the bonds. .
Eskom’s debt pile is not only large, it is also complex.
According to the company’s latest report, just over 42% of its 396 billion rand weight is in rand-denominated domestic bonds and almost a third is owed to development financial institutions including the World Bank and the China Development Bank.
Another 15% are international bonds, held by global asset managers such as PIMCO, BlackRock and Fidelity, according to recent filings. Citi says three quarters of its bonds are guaranteed by the government.
Eskom’s international bonds can rise if the government takes two thirds of the debt, said Wolman, while limiting that to one third or carrying out the debt transfer over a long period of time could be negative.
While Godongwana said a phased transfer would be done to keep South Africa’s debt-to-GDP levels stable, he did not provide details.
The plans have been years in the making with the government first thinking about a debt transfer some four years ago, said Olga Constantatos, head of credit at Futuregrowth Asset Management.
“The magnitude of the crisis in Eskom is escalating and we believe that there is a need for more urgent and focused action,” she said.
While the situation is urgent, it may take some time before transfer action takes place after the budget.
“There is likely to be little in terms of action on the back of this announcement,” said Alexander Rozhetskin at Citi. “We expect that Eskom will need to meet certain criteria before it can discharge some of its sovereign debt.”
Citi is positive on Eskom’s debt, especially longer-dated issues that would benefit more from a transfer, and predicts that spreads could tighten by at least 100 basis points.
Eskom’s bonds appear to reflect some of that optimism, with some of its international issues up more than 8 cents on the dollar this year to trade at multi-month highs, it shows Tradeweb data.
Khanyisa Phika and Murendeni Nengovhela, economists at Alexforbes, a South African firm that owns Eskom’s debt, expect the government to present a “credible action plan” and take on 250 billion rand of its debt. But they also hope that the government will make progress on another long-standing issue, namely the division of the behemoth into arms of generation, transmission and distribution.
Split or not, Eskom “should now be seen as an extension of the sovereign, and the bonds should trade as such”, JPMorgan analyst Zafar Nazim wrote in a note to clients, urging investors to buy Eurobonds of Eskom before the budget.
He calculated that even without the debt transfer, recently approved tariff increases of 18.6% for the financial year 2023/4 and 12.7% for 2024/5, together with government cash injections which ongoing, reducing Eskom’s net leverage to less than three times by 2024/5, from 6.5 times three years earlier.
Eskom’s diversity of creditors has given the company a wide range of funding avenues but it can also hold back any debt transfers, said Jones Gondo, an analyst at South Africa’s Nedbank.
“At any point, any of those groups can say we don’t like this,” Gondo said. “The transaction will not succeed unless you transfer the full amount. You cannot have any kind of overhang in the execution of this.” ($1 = 16.9762 rand)
(Reporting by Rachel Savage and Kopano Gumbi in Johannesburg, additional reporting by Promit Mukherjee; Marc Jones and Jorgelina do Rosario, editing by Karin Strohecker and Kirsten Donovan)
