Rand strengthens as Eskom proposal soothes traders’ nerves

11th July 2019 By: Bloomberg

The rand rose to the strongest level since February after Eskom Holdings biggest bondholder was said to have a rescue plan for the state-owned company.

The currency, which was already being buoyed by a global rally, added as much as 0.9%, bringing the dollar-rand pair close to crossing below its 200-week moving average. The nation’s 2026 bonds rallied, putting the yield on course to closing below 8% for the first time in more than a year.

The Public Investment Corp. wants to convert its $6.4-billion holding into equity in return for a say over Eskom’s management, including board representation, said five people with direct knowledge of the talks.

“A debt-equity swap means that a creditor becomes a shareholder, and if the amount of debt swapped is large enough, even potentially a controlling shareholder. In my lingo, that is tantamount to privatization, albeit in stealth mode,” said Cristian Maggio, the head of emerging-market strategy at TD Securities in London.

“Personally, I don’t think it’s going to happen unless the government accepts that privatization is needed. It would be a very welcome development, but it ain’t gonna happen.”

A plan for the struggling utility would be a relief for government bonds and the rand, which have been weighed down by concerns over the impact of bailouts on the nation’s finances. The potential proposal coincides with a rally in emerging markets, which advanced on bets the US will cut borrowing costs this month for the first time in more than 10 years.

The rand added 0.9% as of 2:29 p.m. in Johannesburg to 13.8650 per dollar. The main stock gauge was little changed.

Eskom, which supplies about 95% of the electricity used in Africa’s most industrialized economy and has been labeled “too big to fail” by President Cyril Ramaphosa, has more than 440-billion rand ($32-billion) of debt, and doesn’t generate enough cash to service it. The National Treasury is finalizing a bailout plan over and above the 68-billion rand pledged in the February budget.