Outlook Upgrade in South Africa Results in Lower Risk for Eskom Bonds

The premium on dollar bonds from South Africa’s state-owned power utility, which come with government guarantees, has shrunken to its lowest point since these securities commenced trading in 2018.

Investor confidence in Eskom Holdings’ debt is on the rise, supported by a recent upgrade in South Africa’s credit outlook, enhanced operational stability, and ongoing state backing.

S&P Global Ratings revised the sovereign’s outlook to positive earlier this month, which also benefited Eskom’s assessment as a government-related entity. The ratings firm noted increased political stability and a momentum for reforms.

The reduction in the premium signifies investor optimism that South Africa’s improved fiscal path will enhance Eskom’s ability to meet its obligations, even for bonds without direct guarantees.

The yields on Eskom’s 2028 dollar bonds that lack state backing fell by 2 basis points to 7.12% by 11:02 a.m. in Johannesburg, marking a two-week low. This yield has decreased by 135 basis points this year.

S&P has upgraded Eskom’s long-term global scale ratings for both foreign and local currency to positive from stable, maintaining the utility’s ‘B’ issue rating on senior unsecured debt and the ‘BB-’ foreign currency issue rating for government-guaranteed debt.

S&P pointed to South Africa’s debt relief package—announced in July last year—as a vital element supporting Eskom’s improved outlook.

“Our positive outlook is based on the ongoing support the group is receiving from the South African government,” stated Omega Collocott, primary credit analyst at S&P. “We anticipate that Eskom’s liquidity position will improve and the risk of default will decline as the ongoing debt relief package is implemented.”

Nevertheless, Eskom’s stand-alone credit profile is still rated ‘ccc’, reflecting its weak business risk profile and heavily leveraged financial risk profile, according to S&P.

Eskom remarked that the upgrade highlights the progress made in restoring its financial health and operational reliability, as noted by Dan Marokane, group chief executive, in a statement.

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