/ 1 September 2016

Denmark’s Jyske Bank joins Futuregrowth in ‘pulling plug’ on Eskom

Eskom's research
Eskom's research

Denmark’s Jyske Bank became the second money manager to say it won’t lend to Eskom after the nation’s biggest specialist fixed-income manager said it had stopped extending credit to state-owned companies amid concern about their governance.

“We pulled the plug on Eskom too yesterday,” Rune Hejrskov, senior money manager at the Silkeborg, Denmark-based company said Thursday in e-mailed comments. 

“I could easily see more lenders follow suit. We see issues on lending going forward and more governance issues.”

Hejrskov, who helps manage about $1.3-billion at Jyske Bank, said he moved to being underweight in power company Eskom’s bonds from medium weight. Futuregrowth, with $11.7-billion in assets, told Bloomberg Wednesday it shelved plans to lend more than R1.8-billion to three state companies this week, citing concerns about how they are being run. 

Other South African fund managers including Sasfin Asset Managers and Aeon Investment Management expressed support for Futuregrowth, while stopping short of saying they won’t lend to state-owned enterprises.

Governance issues

Finance Minister Pravin Gordhan has been at loggerheads with President Jacob Zuma over the minister’s calling for the firing of the nation’s tax chief for insubordination and the replacement of the board of the unprofitable state airline. Treasury has also clashed with Eskom about its efforts to review coal-supply contracts with Tegeta, a company linked to the Gupta family, who are friends with Zuma and in business with his son. Questions over governance at Eskom may increase, said Hejrskov.

“I see no other way, with the discord between Zuma and Gordhan, more and more governance issues showing up,” and the “Gupta family having a much larger influence than previously expected,” he said.

Eskom and state-owned ports and rail operator Transnet are credible and reliable borrowers who have received unqualified audit reports, Public Enterprises Minister Lynne Brown said in an e-mailed statement.

“I urge current and potential future investors to directly engage with me and the state-owned companies about any matter of concern in regard to their investments,” she said.

Yields on Eskom’s $1.25-billion of bonds maturing in 2025, which jumped by the most since February on Wednesday, dropped 3 basis points to 7.19% by 4.19pm.

“We strongly support the sentiments by Futuregrowth,” Philip Bradford, head of fund management at Sasfin, said on Thursday. 

“What it will do is raise the issue with government, with national treasury and with the SOEs, and raise the fact that governance is incredibly important when buying bonds and other investments for our clients.”

Government announced last week that Zuma will lead a new panel to oversee all state-owned companies to ensure they help develop the country, a role previously delegated to Gordhan and other ministers. 

Gordhan has refused a request to report to police for questioning as part of an investigation by the Hawks into alleged irregularities at the South African Revenue Service, which he ran from 1999 to 2009. While Gordhan has denied any wrongdoing, there is speculation he may be arrested and removed from his post.

“More asset managers should be doing that, coming out quite clearly,” Asief Mohamed, who helps manage R3-billion in mostly equity funds as chief investment officer at Aeon, said from Cape Town. 

“From a long-term investment perspective, if you have these corporate governance lapses, the credit quality of the underlying entity, whether its a parastatal or private-sector company, most likely will deteriorate.”

Old Mutual, South Africa’s biggest private money manager and owner of Futuregrowth, said the unit’s decision did not represent the broader views of the company.

Investment performance

“We respect the independence that fund managers need to deliver investment performance for clients and believe that a more constructive model of engagement is needed and necessary to build and increase socio-economic development and drive financial inclusion in our country,” Ralph Mupita, the chief executive officer of Old Mutual’s Emerging Markets unit, said by e-mail. 

“Old Mutual remains committed to our existing commercial relationships and public-private partnerships with state-owned enterprises.”

The ANC said it was concerned by Futuregrowth’s actions and that the generalisation that state-owned companies were beset by corporate governance challenges was erroneous and unfortunate.

“Where there are challenges, these have been identified and, amongst others, interventions made to strengthen these institutions,” the party said in a statement. 

“We believe that Futuregrowth, or any other investor, should await the outcome of these interventions before taking any preemptive stance.” – Bloomberg