Bond yields power onward

PUBLISHED : Sunday, 05 December, 1993, 12:00am
UPDATED : Sunday, 05 December, 1993, 12:00am

SOUTH Africa was one of the first countries to develop the commercial use of electricity. The town of Kimberley in the Northern Cape had electric lights installed in 1882.

For many years, Eskom has offered investors returns of between 15 and 20 per cent but, despite its consistent yields, people know little about the company.

The company's name is an acronym for the Electric Supply Commission, established in 1923.

Today, it supplies more than half of the electricity generated in Africa. With an installed capacity of almost 39,000 megawatts, employing 46,000 workers in its 25 plants, Eskom is one of the world's biggest and most technologically advanced utility companies.

Its plants are still mostly coal-fired, but it also generates hydro-electric power, and, in 1984, commissioned Africa's only nuclear power station at Koeberg.

It has an installed capacity of 1,830 megawatts.

Eskom, technically, is not a government corporation but a self-financing undertaking. It has no shareholders and is funded by earnings and Eskom bond issues.

Rand revenues have risen on average 15 per cent each year since 1986, while the unit price of electricity has risen 11.2 per cent annually.

Like most large electricity companies, Eskom is a major issuer of bonds but they are unlike other utility bonds.

By taking advantage of the South African two-tiered exchange rate system, investors can earn effective yields of between 15 and 20 per cent.

If South Africa continues to make progress towards political stability, investors will see substantial capital gains.

The commercial rand is the currency normally used in South Africa and the financial rand trades at a discount to the commercial rand of about 20 per cent.

South Africa's exchange control regulations require that transactions involving sales of South African assets to non-residents take place in financial rand.

Foreign investors can use financial rand to buy Eskom bonds. Bonds are bought and sold at the rate which gives the most rand, with interest in the rate that provides the hardest currency.

Depending on the size of the discount, this can dramatically affect the size of the Eskom yield. Buying in a period of unrest and selling in a period of calm can realise substantial capital gains.

If the fin rand is abolished, which may happen during the next few years, or the discount shrank to zero, money would be paid out in commercial rand, which buys more hard currency.

The combination of coupon interest plus the extra money at maturity puts the yield at between 13 and 16 per cent. But the effective yield is even greater because investors buy in financial rand but get paid interest in commercial rand.

At present, the effective yield is between 17 and 20 per cent.

For more information on buying Eskom bonds, contact your broker, the South African Consulate in Hong Kong, or any of the South African banks in the territory.