Eskom Holdings' bonds, rated deep junk, are the gift that keeps on giving. The securities yield more than the government’s debt, yet are backed by a guarantee that kicks in before a default is even on the horizon.
The yield premium on Eskom’s rand bonds has
tightened this year, even though the company has a stand-alone credit score nine steps below investment grade at Fitch Ratings and a debt pile of 450 billion rand ($30 billion). That’s because they still offer a pickup of more than 100 basis points and are, in effect, as safe as the sovereign’s.
About two-thirds of the rand bonds are backed by an explicit government guarantee that was designed also to improve the position of holders of the non-guaranteed securities, according to a briefing document on the agreement between Eskom and the government, published on the company’s website. Under the terms of the agreement, the government is obliged to step in when Eskom anticipates payment pressure, to prevent a default. It also rules out cross-defaults.
Eskom, which supplies about 95% of the nation’s electricity, doesn’t generate enough cash to service its debt, and is struggling to meet demand from its old and poorly maintained plants. The government has already allocated it 138 billion rand in bailouts over the next three years, but plans to turn the company around -- including the appointment of a permanent chief executive -- are lagging.
The most important thing to remember about the guarantee is that the whole intention is to not have it called upon,” Omega Collocott, a corporate ratings director at S&P Global Ratings in Johannesburg, said in an interview. “The way it works is that Eskom can anticipate a crunch and get a loan from the government to cover it. Investors are protected.”
- Bloomberg
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