Eskom approaches bond market

Johannesburg - Eskom could pay a steep price to tap the debt market.

On Friday the embattled power utility announced it would be raising R500m on its 10-year bond and looking for a further R2.8bn in inflation-linked insurance when it approaches the bond market in an auction on Wednesday.

Nedbank chief economist Dennis Dykes told Fin24.com: "The disadvantage is that inflation may rise by more than Eskom or anyone else expects.

"Even though there is a natural hedge, it would not look all that smart if you end up paying say 20%, instead of locking it in at 10%."

However, Dykes added inflation could also surprise on the downside.

With inflation becoming a concern for global asset managers on the back of major stimulus initiatives adopted by various governments, inflation-linked products have become increasingly popular.

"Unless central bankers react decisively to the early signs of inflation, there is a real risk that consumer prices could increase at a faster rate over the next decade than what is currently priced into financial markets," said John Stopford, co-head of Fixed Income at Investec Asset Management in a recent note to clients.

Stopford warned clients to focus more on inflation protection within their portfolios.

FNB economist John Loos said: "CPI-linked bond offers the investor in the bond better protection against inflation fluctuations in future years, as opposed to a non-inflation linked bond where it is a set nominal amount that will be paid to the holder of the bond."

Citigroup chief economist Jean-Francois Mercier said: "The advantage of a CPI-linked bond is mainly for the holder of the bond, who is then protected against inflation."

He added this type of bond is often issued in periods of relatively high and volatile inflation, when the issuer is worried about low appetite for a long-maturity, fixed-coupon bond.

- Fin24.com