ESKOM HOLDINGS SOC LTD:Board overhaul drives Eurobond rally

After an eventful last week, which saw bouts of negative headlines from S&Pciting “clear danger of default by Eskom” and South African exchange warningsuspension of Eskom’s listed debt securities upon failure to submit its interimfinancial report, the weekend saw some positive developments aimed ataverting a liquidity crisis and addressing corporate governance issues atEskom. This involved a major overhaul of the company’s management boardincluding an order to remove all executives facing corruption allegations. Thenew board includes high-profile business executives including Telkom SA SOCLtd. Chairman, Jabu Mabuza, who was named the new Chairman, as wellformer MTN Group CEO. Reportedly, the former South African FinanceMinister Mr. Nene was also considered for the Chairman post. We believe thisoverhaul of the board would help ease the corporate governance issues raisedby some of the lenders and pave the way for securing future fundingcommitments. According to Bloomberg, citing Eskom’s spokesman, Eskomhas started engaging with banks to reopen previously closed credit facilitiesand is hopeful that South African National Treasury will support Eskom’s bid toraise its liquidity levels to targeted ZAR20bn (USD1.66bn).

    Overall, we view these developments as credit positive, which is also reflectedin the Eskom’s Eurobond yields which dropped by 55bps since the lastThursday (see the chart). At the same time, we also caution against gettingcarried away and seeing this as full resolution of Eskom’s challenges. Amongother things, the Company still needs to report its interim financial resultsbefore 31st January to avoid suspension of its listed debt securities on JSE.

    Recall that in late December last year, the Company delayed the release of its2017/2018 interim financial results in order to afford itself the opportunity toreview the impact of the 5.23% tariff increase and to allow the newlyappointedboard members sufficient time to review the financials. Morerecently, it confirmed to release the financials on or before 31st January. Also,and more importantly, a full resolution of its financial woes would dependupon future financial discipline, mainly on cost and capex front, generatingpositive internal cash flows and securing sustainable funding sources for itsfuture needs without drawing upon additional government guarantees.