Eskom Risk Premium Falls as Turnaround Wins Over Bond Investors

(Bloomberg) -- Eskom Holdings SOC Ltd.’s risk premium is dwindling as a turnaround at South Africa’s state-owned electricity company gathers momentum.

The extra yield investors demand to take on the risk of holding the utility’s dollar debt without the benefit of a government guarantee narrowed to the lowest on record following the publication of the utility’s results on Thursday. And the yield premium over comparable US Treasuries is also at the lowest since the Eskom securities were issued in 2018.

That’s despite the utility reporting a mammoth 55 billion rand ($3 billion) annual loss for the year through March. It also revealed a fraudulent scheme that cost it billions in lost revenue, while arrears from delinquent municipalities continued to swell.

Instead, investors are focusing on Eskom’s prediction of a profit for this fiscal year, which would be the first since 2017. Overall debt levels have also dropped as the company benefits from a government bailout, with loans being converted to equity as it meets targets.

The utility has made significant repairs to its largely coal-fired fleet of plants that generate almost all of South Africa’s electricity, preventing outages for almost nine straight months. “It’s looking positive,” Chief Financial Officer Calib Cassim said in an interview on Thursday - and investors appear to be taking his word for it.

Yields on the company’s 2028 dollar bonds that are not covered by an explicit government guarantee have fallen 126 basis points this year to 6.87%, near a three-year low. The yield on similar-maturity notes with government backing has dropped 58 basis points over the same period to 6.50%.

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