Some of the bonds of South African state-run power company Eskom have rallied as much as 50bp in the last week, as a mandate for a government-guaranteed bond was released.
Many investors see that government guarantee as evidence that the government will not let Eskom fail. Not only that, but syndicate officials are saying that Eskom previously did not have standalone market access, but now does, purely on the basis that the government is putting its money where its mouth is.
An unguaranteed tranche was on Thursday set to be printed alongside the guaranteed one.
It is worth noting that nothing in the corporate's credit quality essentially has changed.
Eskom’s stand-alone rating is still deep in junk territory at B2/CCC+, or B3/CC+ for its non-guaranteed notes, with Moody’s saying that “despite a number of improvements at the company in relation to corporate governance and liquidity, Eskom faces a number of significant challenges in placing the company's longer term business and financial profile onto a sustainable footing”.
Eskom, the largest producer of electricity in Africa, is still, and has always been, of great importance to South Africa, but its debt/Ebitda ratio is around 10x and its debt burden looks set to rise.
Similarly, Bahrain's bond prices bounced in late June, as investors’ fears of the country’s inability to meet the repayment of its $750m November 2018 sukuk began to recede, following a statement of support from Saudi Arabia, Kuwait and the United Arab Emirates.
So many EM analysts spend their time looking at the company and bank balance sheets, bemoaning the lack of transparency in some cases.
And as well they should — without that scrutiny, these markets would often remain unpoliced and underdeveloped.
But it is a sad truth that for all the hard work that goes into investors finding good emerging market investments by looking at the detail, it remains true time and time again that often the best investment is going to be in an entity that has powerful, wealthier allies or a parent ready in the wings to clean up a mess.