Bond yields reflect doubt about Andre de Ruyter heading Eskom
As the new CEO has no public-side experience, the market is not sure about him lasting long at Eskom, trader Michelle Wohlberg says
Yields on Eskom's 2021 dollar bonds jumped the most in more than three months after the appointment of Andre de Ruyter as CEO on Monday.
The premium of two-year over 10-year dollar yields narrowed, suggesting investors are concerned De Ruyter won’t be able to address the debt-laden firm’s short-term challenges.
De Ruyter, CEO of packaging company Nampak, has considerable corporate experience, though not at a utility. His appointment comes at a time when Eskom is undergoing a transformation that will require technical and financial knowledge as well as the ability to deal with the government and labour unions.
A R138bn government bailout has bought it just two years to effect a turnaround and deal with its R450bn rand of debt.
De Ruyter’s appointment “shocked the market somewhat as it was a name that no-one had expected,” Michelle Wohlberg, a trader at FirstRand in Johannesburg, said in a client note. “As the new CEO has no public-side experience, the market is not sure on him lasting long.”
Yields on Eskom’s $1.75bn of securities due in 2021 climbed 32 basis points on Tuesday to 5.47%, the highest in almost eight weeks, after jumping 17 basis points on Monday. The yield spread of the 2021 notes over 2028 bonds narrowed 31 basis points in the two days.
The appointment of a permanent CEO has been delayed for months as the government considered a list of 140 candidates. De Ruyter’s name didn’t feature in speculation about the three shortlisted candidates, and he may have been a compromise candidate, said Peter Attard Montalto, head of capital-markets research at Intellidex UK in London.
While Eskom used to be ranked as one of the world’s best-run power utilities and had surplus generation capacity, its old and poorly maintained power stations are now battling to meet demand, and its construction of two massive new plants are running way over budget and behind schedule.
Besides having to keep the lights on and complete the build programme, De Ruyter’s other tasks will be to ensure Eskom gets its debt burden under control and becomes financially sustainable. He’ll also have to help implement a government decision to split the utility into transmission, generation and distribution units under a state holding company — a plan opposed by unions that fear it will lead to privatisation and job losses.
“The question of how much benefit of the doubt to give De Ruyter comes up,” Attard Montalto said in an e-mailed note. “Eskom does not have time, has had 10 CEOs in 10 years and has strict deadlines set in the Eskom road map. Actions will be judged from the get go.”