(Bloomberg) — A rare moment of investor goodwill for South Africa’s most indebted company is being tested by its inability to collect a staggering $5 billion in unpaid bills from cities and towns across the country.
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With Eskom Holdings SOC Ltd on the verge of turning its first profit in nearly a decade, State Street Liquidity Plc, JPMorgan Investment Management Inc, abrdn Plc, and Thrivent Financial are among funds that added to holdings of its 2028 bonds in the latest quarter, filings show. That’s helped push the extra yield investors demand to own Eskom debt without a government guarantee to the lowest on record.
Now some of those investors are saying urgent action is needed to make sure the long-troubled energy utility gets the money it’s owed.
“The municipal debt problem is of ongoing — and growing — concern,” said Olga Constantatos at Futuregrowth Asset Management. “The growing scale of the problem requires immediate and decisive interventions and some tough trade-offs by government, which historically has been a challenge for this and previous administrations.”
The power issue is one of the biggest challenges for the new South African government, which took office last year on an agenda of reform aimed at rooting out corruption and kickstarting economic growth.
The National Treasury did introduce a debt-relief program for municipalities in 2023, provided they met certain conditions. But uptake has been slow, and many councils are failing to enforce the required credit controls, meaning they cannot collect enough money to pay Eskom.
Municipal payment levels have actually declined and are now below 85%, compared to 90% two years ago, Constantatos noted.
The extra yield investors demand to hold Eskom dollar debt without the benefit of a government guarantee has slipped to the lowest on record. And the yield premium over comparable US Treasuries is at the lowest since the securities were issued in 2018.
“Although significant challenges remain, we believe Eskom is progressing toward achieving a sustainable business model and fulfilling its debt obligations,” said Franck Bekaert, an analyst at research firm GimmeCredit, which rates Eskom bonds at “outperform.”
Bekaert said, however, that Eskom’s longer-term financial viability without state support hinges on “implementing a cost-reflective tariff path for the coming years.”
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The company’s request for a 36% increase in tariffs for the 2026 financial year has not gone down well with the public, which has already faced a 600% rise in electricity costs since 2006. The government too says such hikes will exacerbate energy inequality, and is examining measures to keep prices down.
Eskom, which is receiving a 250 billion rand bailout from the government, said the increase is needed to prevent the indebted company from returning to the authorities for further financial help. The hike would be for the 12 months to March 2026 and would be followed by increases of 11.8% and 9.1% for the following two years.
Eskom’s application for the tariff increase is pending with the National Energy Regulator, which is expected to announce its decision by end of January.
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–With assistance from Andras Gergely.
(updates with tariff data in penultimate paragraph)
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