State-owned South African power utility Eskom has launched and priced its planned three-year bond on Friday, defying European national holidays and emerging bond market volatility that might have derailed it.
Lead managers Credit Agricole Indosuez and Dresdner Kleinwort Wasserstein said on Friday they had priced the 200 million euro international bond at 99.899 percent of face value, with a coupon of 5.5 percent, yielding of 200 basis points over benchmark euro swaps.
This is at the more expensive end of the yield premium estimate of 200 to 220 basis points over swaps published by the banks earlier in the week. The fact that the bond was priced at that end of the range suggests good demand, but the fact that the bond was delayed for a day, from Thursday to Friday, suggests the reverse.
”Interest for the bond certainly has been fairly slow,” said a trader in the group of banks assisting the lead managers. ”The German holiday was one of their problems.”
On Thursday German banks and asset managers closed for the reunification day national holiday.
German institutions tend to invest in South African bonds, because, like much of eastern Europe, the country is perceived to be restructuring its economy to perform more like those of western Europe.
German bond buyers made hefty profits in eastern Europe through the 1990s, as eastern European bonds soared in price thanks to restructuring designed to prepare those countries for joining the European Union.
”I am a little bit sceptical (about the Eskom bond) at this point in time,” said Michael Ganske, emerging bond fund manager at DWS Investments in Frankfurt. He said he had looked at the bond and decided not to buy, although Eskom’s managers appeared efficient and capable at presentations given to fund managers in Germany.
”This kind of issue is for buy and hold investors and insurers. I don’t expect Eskom to go into default, but why should I buy it now,” he said. He cited illiquidity that would prevent the bond tracking upward price moves, but also prevent buyers from selling if the market collapses.
Emerging bond fund managers have to worry about movements in their benchmarks as well as the yields on the bonds they buy. Brazil, which is around 17 percent of key emerging bond benchmarks, goes to the polls this weekend and the country looks most likely to elect the candidate least favoured by markets, the Workers Party’s Luiz Inacio Lula da Silva.
The country’s bonds have fallen by more than 30 percent since mid-April when markets first began to suspect that Brazil might well vote for Lula. Emerging market investors expect sharp swings in Brazil bond prices on Monday, when the election result be known.
Eskom is the world’s fifth largest power utility, one of the state-owned enterprises targeted for restructuring by the South African government by 2004.
The company is rated BBB- by Standard and Poor’s. Moody’s Investors Services gives Eskom a Baa1 rating, one notch higher than the South African government. The state itself is rated BBB- by S&P, Baa2 by Moody’s and BBB- by Fitch Ratings. – Reuters