International investors still seek Eskom bonds despite its financial woes

Despite rolling blackouts, and even being cut to junk status by one credit ratings agency, Eskom debt still appears appetising to international investors hungry for high returns. The utility’s latest international bond sale was almost four times oversubscribed.

While Eskom waits for government’s rescue package to kick in and for higher electricity tariffs, it continues to raise money in the bond market to fund its generation expansion projects, such as Medupi and Kusile, which have faced massive cost overruns and significant delays.

The bulk of Eskom’s debt is issued in the local market, but has enjoyed some success offshore recently too.

Last week Standard Bank announced it had partnered with Eskom to sell $1.25-billion in 10-year fixed-rate bonds into the international capital markets. The funds will enable the state-run utility, which produces more than 95% of South Africa’s and 40% of Africa’s power, to finance its generation expansion programme, according to a bank press release.

Latest sale was well-supported
But $1.25-billion will not do much to plug the funding gap that Eskom says is at least R250-billion wide.

The latest sale “was a very well-supported book that held stable at the lower end of our initial pricing thoughts”, said Megan McDonald, global head of Debt Primary Markets at Standard Bank.

“The fact that the bond was almost four times oversubscribed is a strong vote of confidence from international investors which will enable Eskom to fund its expansion programmes and add additional generating capacity. This is an excellent outcome against challenging market conditions with concerns over Greece and potential increases in United States treasury rates.”

Standard Bank has acted as a joint lead manager and book runner on the sale of the bonds which mature on February 11 2025. It said Eskom had initially planned to sell a benchmark $1-billion bond but expanded its offering after it received bids totalling almost $4.3-billion from about 280 investors from across the globe.

Eskom last sold debt in the international markets in August 2013 when it issued $1-billion of 10-year bonds and received bids worth more than $4-billion from 225 investors.

The majority of Eskom’s bonds were sold to US investors (52%) followed by those from the United Kingdom (29%) and Europe (16%). This was despite the fact that Moody’s junk (or sub-investment grade) rating of Eskom was reflected in its rating of this bond – which was also was not backed by a government guarantee.

The one rating gives them an investment grade rating, and the other does not, said McDonald.

Government’s rescue package
The interest in Eskom bonds can be explained in two ways. 

First, that investors looking for high yields are still required to turn to emerging markets and issuers from these markets, such as Eskom, while yields in developed economies remain at all-time lows.

Second, “investors are seeing that Eskom is taking active steps to address the challenges they are going through” and management has outlined a clear way to tackle these, McDonald said, noting government’s rescue package extended to the utility has boosted confidence too. “Investors understand the strategic role Eskom plays and investing on that basis.”

Fixed-income analyst at Sasfin, Mamokete Lijane, said there was a decent market for non-investment grade utility paper in international markets.

“Investors consider the utility’s ownership structure and where the ownership is mostly government, consider them as implicitly guaranteed. Because there is no explicit guarantee though, they are issued at a higher yield to the one at which they would have been issued without the guarantee,” Lijane said. 

“The higher yield also attracts investors. Quantitative Easing supports demand for high-yield paper so that might have also been a factor in the higher demand.”

According to data provided to the Mail & Guardian by INET BFA about a long-term Eskom bond, known as the ES33 and which matures in 2033, the average bond yield for January 2011 at 9% is virtually the same as the average bond yield for January 2015, at 8.9% despite the ratings cut by Moody’s.

Because rand-denominated bonds, such as the ES33, are guaranteed by government, these Eskom bonds are not judged on their own credit quality but rather by government’s credit quality, fixed-income analysts said.

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