Futuregrowth Unmoved on Lending as Eskom Eyes Bond Market

JOHANNESBURG (Capital Markets in Africa) – South Africa’s biggest specialist fixed-income money manager says it’s not quite ready to resume lending to the cash-strapped state electricity company.

Cape Town-based Futuregrowth Asset Management, which oversees about 177 billion rand ($15 billion), halted lending to Eskom Holdings SOC Ltd. in 2016, citing concerns over governance and financial management. While the publication of overdue financial statements this week was a step in the right direction, Futuregrowth’s position hasn’t changed, though it may reconsider at some stage, Chief Investment Officer Andrew Canter said.

“As Eskom finalizes its accounts, makes amends, strengthens its governance, and improves its reporting we would expect to be able to consider resuming channelling some of South Africa’s savings toward Eskom,” Canter said in an emailed response to questions.

Eskom said it plans a return to the domestic bond market in April, and may tap international markets in the second half, provided it can get a clean audit by then. The company also needs to raise 20 billion rand in the short term to boost liquidity, acting Chief Financial Officer Calib Cassim said after the financial results presentation on Tuesday, a day before a possible suspension of its debt instruments from the Johannesburg Stock Exchange.

Other lenders shared Futuregrowth’s caution. Jones Gondo, a Johannesburg-based credit research analyst at Nedbank Group Ltd., said Eskom still had to convince investors it was willing and able to address governance issues and improve its liquidity position.

“Investors won’t be tempted yet by Eskom debt,” Gondo said. “Bond investors initially stopped supporting Eskom’s funding package because of governance issues and qualified audits. That is yet to be addressed in a meaningful way, although the new board and management are expected to deliver these reforms. The financials alone won’t do it, because they still show significant vulnerabilities.”

‘Biggest Worry’
Profit fell 34 percent to 6.3 billion rand ($529 million) in the six months through Sept. 30 from a year earlier. Debt securities and borrowings swelled 10 percent to 367 billion rand.

Eskom, which hasn’t had a permanent CEO since late 2016, has been roiled by a series of scandals, including allegations of corruption linked to the politically connected Gupta family. Everyone concerned has denied wrongdoing. However, Finance Minister Malusi Gigaba has described the utility as his “biggest worry” and S&P Global Ratings said Jan. 18 that there was a “clear danger” that Eskom could default on its debt. The company is the largest recipient of state guarantees.

Fitch on Wednesday downgraded Eskom’s credit rating deeper into junk, citing the company’s weakening liquidity and uncertainty about its ability to meet its short-term financial commitments. Moody’s Investors Service cut its assessment on Monday.

Still, relatively high yields, underpinned by government guarantees, make the locally-listed bonds an attractive prospect to investors willing to take on risk. The yield on Eskom’s rand-denominated bonds due in April 2026 yield jumped 17 basis points on Tuesday to 9.66 percent, widening the premium over similar-maturity government debt to 126 basis points, the most on record.

“There will always be investors willing to go for debt like Eskom’s,” said Abri du Plessis, a portfolio manager at Gryphon Asset Management in Cape Town. “There are those who will chase yield,” though Gryphon wasn’t one of them, he said. “I don’t think they’re out of the woods yet.”

Source: Bloomberg Business News