A measure of Eskom’s credit risk has narrowed to the lowest in a year as investors deepen bets that South Africa’s State-owned power utility has turned a corner after years of crisis.

The extra yield investors demand to own Eskom’s 2033 rand bonds rather than South African government debt has compressed to about 88 basis points from a high of 155 in May. The gap has averaged 115 basis points over the past five years as the utility grappled with a debt burden and mismanagement that moved Goldman Sachs to describe it as the single biggest threat to South Africa’s economy.

The bond rally follows steady progress on Eskom’s restructuring plan, supported by the government’s R254-billion debt-relief package announced in 2023. The utility has cut its total debt to R372-billion by March, from 412 billion rand a year earlier, and aims to lower that figure to R300-billion within two years, when it plans to return to debt capital markets.

Eskom has largely stabilised South Africa’s electricity grid after years of record blackouts caused by breakdowns at coal-fired power plants that weighed on its revenue and crimped economic growth. In September, it reported its first full-year profit in eight years.

“In a world where investors are looking for yield, Eskom bonds might just be flavour of the month, as long as the lights remain on and news flow remains positive,” said Ockert Doyer, head of credit at Sanlam Investments, the utility’s second-largest bondholder.

The narrowing spread suggests the company may find willing buyers when it returns to the bond market as a stand-alone borrower. Eskom’s existing bond-market rand debt is guaranteed by the government, reducing the risk for bondholders.

It aims to raise R75-billion over three years in new debt without government guarantees starting in 2028, it said in its earnings report in September.

“Investors seem to think about 100 basis points is sufficient compensation to hold the Eskom bond over the government bond,” Doyer said “This spread might trend to 80 basis points if Eskom continues with the improved results.”

Eskom’s two dollar bonds, both maturing in 2028, have also performed well. Yields on its 8.45% securities, which do not carry a government guarantee, have fallen more than 300 basis points from an April high to a record-low 5.42% at the end of October. The premium of those yields over comparable US Treasuries has narrowed to 198 basis points, near an all-time low.

Eskom reported a R16-billion profit after tax for the year ended March 31, 2025, compared with a R55-billion loss a year earlier. The turnaround was driven by cost containment, efficiency gains and better collection from municipalities, though arrears from municipalities that buy their electricity from Eskom still exceed R100-billion.

Credit investors will watch Wednesday’s mid-term budget update by Finance Minister Enoch Godongwana for clarity on whether the government will continue to shield Eskom from fiscal stress as it gradually withdraws guarantees. While lower yields will aid refinancing, the utility’s longer-term credit profile will depend on maintaining operational stability and curbing new debt.