Interest in South African power utility Eskom’s bonds appears to have waned and may not recover until a government plan to recapitalise it is finalised. Investors have become increasingly cautious towards Eskom paper amid a severe power crisis, especially after unfavourable assessments from international credit rating agencies, analysts said.
Standard & Poors put Eskom on Creditwatch on January 11, citing negative implications from the company’s planned five-year 300 billion rand spending programme to boost supply.
Moody’s in July last year downgraded Eskom’s Baseline Credit Assessment — which measures the likelihood of an issuer requiring an extraordinary bailout — to Baa1 from A3.
Analysts said the credit agencies’ concerns and power cuts of the last three weeks that halted production at mines and hit consumers across the country had highlighted risks associated with the company.
"Most funds do not have an interest in buying Eskom paper given the power shortage and the risks of them having to increase tariffs and raise more capital," said Neil Evans, bond dealer at Nedbank.
"That is why over the last six months the Eskom spreads have lost 30 to 40 basis points over the government curve," he said. "So, essentially the market is still very nervous and there are risks of further weakness in the spreads, but we don’t expect them to widen more than 10 to 15 basis points from now."
Eskom’s ES26 yield spread over the R186 government bond widened by 33 basis points from June last year to January, while the ES33 spread widened 31 basis points over the R209 in that period.
"If the spreads keep widening it will make the funding more expensive," said another dealer. "I think somehow government needs to get involved and just create certainty: markets like certainty."
Eskom has said that the agreed 14.2 percent tariff increase for 2008 was not enough to meet its expansion demands and government — the main shareholder — has hesitated about recapitalising the electricity supplier.
On Tuesday, Public Enterprises Minister Alec Erwin said recapitalising Eskom was "inevitable", but added the issue was complex and a decision would be made this year.
Dealers said until the details of government’s programme are clear, investors will likely steer clear of Eskom notes.
"My view is that spreads are going to come under a lot of pressure until there is more certainty around the funding requirements," the trader said.
He said cheaper bond prices would likely not be enough to entice investors into Eskom notes.
"Investors are telling us there’s no rush to get into Eskom bonds which is why there needs to be certainty. When that certainty is provided, you will find that they’ll start trading a lot better."