Persisting operational challenges are likely to constrain Transnet’s recovery from the Covid-19 fallout while insufficient investment might result in weaker operational performance than anticipated for the battered state-owned entity (SOE), says ratings agency S&P Global.
On Monday S&P lifted the credit watch imposed on Transnet in November 2021, citing the company’s improved liquidity position, and affirmed all of Transnet’s ratings. However, it maintained its outlook as negative.
Capacity constraints at Transnet Freight Rail linked to the group’s largest operating division’s less-than-optimal number of locomotives in operation, cable theft and infrastructure vandalism have been blamed for stifled growth at the SOE.
S&P noted that while it was still of the view that Transnet’s liquidity is less than adequate, the firm recognises the improvements to its liquidity profile after the recent refinancing.
Transnet had a $1bn international bond due to mature in July and confirmed on Monday it has secured sufficient funding to redeem the $1bn TNUS22 bond and that this will also support its liquidity requirements.
“We therefore affirmed our ‘BB-’ ratings on Transnet and its senior unsecured debt, and our ‘BB’ rating on the company’s R3.5bn government-guaranteed debt,” S&P said, also affirming its zaAA/zaA-1+ SA national scale ratings on Transnet.
“Our assessment of Transnet’s stand-alone credit profile of ‘bb-’ captures the company's less-than-adequate liquidity,” it said, warning that any potential deterioration in liquidity could trigger a multinotch downward revision of the company’s stand-alone credit profile.
Transnet will still need to pay bondholders R23.5bn as more bonds mature until March 2023.
The agency flagged that social and governance factors were negative considerations in its credit rating analysis of Transnet. It warned that current operational challenges and the cumulative effects of insufficient growth and maintenance capital expenditure might result in weaker operational performance than expected, prompting a return to elevated liquidity and covenant headroom risks.
S&P further said Transnet’s inability to provide the rail volumes required by its customers, particularly in the bulk commodities space, raises the risk of customers turning to alternative transportation channels to maintain their export volumes.
It pointed out that this is evident in the increased use of road freight and non-Transnet-controlled ports in neighbouring countries for bulk commodity exports by companies wishing to capitalise on supportive commodity prices, despite road use being more expensive.
Freight Rail, which recently lifted a three month long force majeure on nine coal exporters, is the largest of Transnet’s five core operating divisions, contributing 59% of fiscal 2021 revenue and 73% of earnings before interest, taxes, depreciation and amortisation (ebitda) — a measure of a company’s overall financial performance.
The ratings agency said operational challenges, compounded by the potential effect of rising inflation on operational costs led it to expect the S&P Global Ratings-adjusted ebitda margin to decline to 35%-40% in 2022-2024 versus the previous forecast of 38%-42%, translating into annual ebitda of R24bn-R30bn.
Noting S&P’s comments regarding the company’s operational challenges Transnet said it “continues with its strategic initiatives to address these”.
Highlighting that things could go either way for the SOE at this point, S&P said it will in the future possibly raise the rating if further improvement in Transnet’s cash flow or liquidity is illustrated.
“This could happen if the company addresses operational challenges faster than expected, leading to enhanced cash flow, and the company secures additional long-term funding while maintaining manageable leverage,” said S&P, noting the Transnet management’s continued efforts to securing additional facilities.
In June Moody’s placed most of Transnet’s credit ratings on review for a downgrade saying it has become increasingly concerned over Transnet’s exposure to weak liquidity management and high refinancing risk.
Transnet’s annual financial results for the year to end-March are expected to be published on Thursday.
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