KEY POINTS
- Eskom’s 2028 dollar bonds without guarantees saw a 126-basis-point yield drop, signaling growing investor trust in its recovery efforts.
- Improved plant repairs ensured nine consecutive months without power outages, bolstering operational performance and market sentiment.
- Government bailouts and debt restructuring reduced Eskom’s liabilities, supporting its goal of profitability for the first time since 2017.
Eskom Holdings SOC Ltd., South Africa’s state-owned electricity utility, is witnessing a significant decline in its risk premium as its turnaround strategy gains traction.
The yield premium on Eskom’s dollar-denominated bonds, which lack explicit government guarantees, has narrowed to record lows following the release of its latest financial results on Thursday.
This trend underscores growing investor confidence, despite Eskom reporting a massive 55 billion rand ($3 billion) annual loss for the fiscal year ending in March. Challenges persist, including a fraudulent revenue-draining scheme and mounting arrears from delinquent municipalities. Nevertheless, optimism around Eskom’s forecasted return to profitability this fiscal year — its first since 2017 — has bolstered market sentiment.
Improved financial outlook
According to Bloomberg, Eskom’s debt burden has eased significantly, supported by government bailouts that include debt-to-equity conversions tied to performance benchmarks. The utility has also made strides in repairing its largely coal-based power generation fleet, achieving an unprecedented nine consecutive months without rolling blackouts.
“It’s looking positive,” said Calib Cassim, Eskom’s Chief Financial Officer, in a Thursday interview. The market appears to agree. The yield on Eskom’s 2028 dollar bonds without government backing has fallen by 126 basis points this year to 6.87 percent, approaching a three-year low. Similarly, yields on comparable bonds with government guarantees have dropped by 58 basis points to 6.50 percent.
Investor sentiment shifts
The narrowing yield spread reflects investor confidence in Eskom’s turnaround measures, particularly its cost-cutting initiatives, operational improvements, and commitment to meeting financial targets. While the utility’s financial health remains fragile, its progress in restoring credibility and delivering uninterrupted power has bolstered its appeal to bondholders.
Eskom’s efforts to rebuild its infrastructure and stabilize operations come at a critical time for South Africa, where reliable electricity is key to economic growth. With its debt restructuring program and improved plant performance, the company has regained trust among investors who were previously deterred by its mounting liabilities and operational inefficiencies.
Broader implications
Eskom’s rebound signals a potential shift in the outlook for state-owned enterprises in South Africa, where governance and financial challenges have long been concerns. The utility’s turnaround strategy, supported by government interventions and operational reforms, could serve as a blueprint for similar entities seeking to restore investor confidence.
As Eskom targets its first profit in seven years, its improving risk profile highlights the market’s recognition of its progress. Investors appear increasingly convinced that the utility is on track to achieve sustained recovery, even as challenges remain.
