Eskom had good news over the weekend when credit ratings agency Moody’s Investors Service assigned an investment grade rating to the $4bn bond it hopes to issue in the foreign market in August.
While Eskom’s foreign debt issuance has in the past not been guaranteed by the Treasury, the proposed dollar bond will be explicitly guaranteed by the state, with Moody’s awarding the rating in line with SA’s sovereign debt at Baa3.
Moody’s rating for Eskom’s stand-alone debt is deep in junk territory at B3. Moody’s affirmed Eskom’s stand-alone rating at B3 with a negative outlook.
It said the rating for the proposed bond "reflects the unconditional and irrevocable guarantee of the South African government. The guarantee will be issued under the government’s R350bn Guarantee Framework Agreement, of which R275m is currently allocated."
Eskom has not issued debt in the foreign market since 2015. It also has not issued domestic debt at an auction since 2016, preferring the "private placement" of debt with investors, in particular with the Public Investment Corporation.
Assuming Eskom issues the full $4bn successfully, together with the draw-down of $2.5bn on the loan from the Chinese Development Bank announced on Tuesday, Eskom will be well on its way to using up the remainder of its government guarantees. Eskom must raise R72bn in funding this year to finance its capital-build projects. The Chinese loan will take it to within 60% of its target.
But some utilised guarantees will be freed up as loans and bonds mature, giving Eskom just enough space to tap the domestic market with government guaranteed bonds later in 2018.
According to its funding plan released last week at the announcement of its financial results, Eskom hopes to raise R13bn in longer domestic bonds and notes, and another R10bn in short-term debt. So far domestic funders have committed R6.3bn. The allocation of various sources of funds may change over the year.
RMB credit analyst Elena Ilkova said while it was anticipated the ratings agencies would give the proposed dollar bond a rating in line with the sovereign, it was "the first time Eskom has issued a guaranteed bond off-shore, so it is difficult to know how investors will view the new bond".
Eskom had not run an auction locally for several years, but a R500m floating note issued in April in the local market attracted a generous spread, indicating the liquidity pressure Eskom was under. However, that pressure was now less of a problem, she said.