Transnet, the state-owned port and rail operator, is facing two bond repayments coming due in the next two months that are worth a combined R1.088bn.
The total amount relates to R556m in bonds maturing on February 7 2023 and another R532m of debt instruments that are due to be repaid on February 13, according to Bloomberg data. While Transnet should have no trouble rolling the debt — a term that denotes refinancing the securities by issuing new bonds — the company will face higher repayment costs on any new instruments given that interest rates have risen dramatically over the past year.
“They’ll probably roll the bonds, but it’s going to be at higher spreads considering the sharp rise in rates we’ve had,” said Ian Scott, head of fixed income at Momentum Investments, a holder of Transnet debt.
The Reserve Bank has raised its benchmark rate by 325 basis points (bps) so far this year, with some economists expecting at least one more hike of either 50 bps or 75 bps when it meets again in January. The three-month Johannesburg interbank average rate (Jibar), a key reference rate for the fixed-income market, has climbed to 7.26% now from just 3.89% at the start of January.
In an emailed response to questions, Transnet said it planned to repay some of the debt and refinance the rest.
“In line with our funding strategy, Transnet has got a plan that incorporates refinancing a portion of its debt and a portion to be repaid with cash from operations,” it said. “We therefore continue to engage with our funders for the refinancing portion, to ensure the maturities are attended to timeously.”
Transnet, which employs more than 50,000 people, is battling severe deterioration and inefficiencies at its rail and port infrastructure, costing producers such as miners, vehicle manufacturers and farmers billions in lost export revenue. Just last month the African Rail Industry Association (ARIA) criticised Transnet for resisting third-party access to its rail lines to remedy a maintenance backlog. The association accused Transnet of posing a sovereign risk to the economy.
“The financial problems at Transnet stem from engineering problems,” said Scott. “If the rail lines or ports aren’t running, you can’t earn revenue — that’s the real problem.”
Transnet has also been beset by vandalism, sabotage, cable theft and even cyberattacks, which have forced it to declare force majeure at its operations far too often. In October, strikes crippled ports, while severe flooding in April damaged locomotives and other assets, prompting the Treasury to allocate R5.8bn to help mitigate the damage.
While the company made more than R5bn in net profit after tax in the year to end-March 2022 — a solid turnaround from the R8.7bn loss the year before — it said at the time that it still faced total debt repayments until 2041 worth a combined R114.6bn (including amortising costs of R52.76bn). The latest Bloomberg data shows Transnet carries R108.24bn in total debt with an average interest rate of 10.09%.
As a state-owned entity, Transnet is effectively underwritten by the Treasury, which means any liabilities can ultimately be funded by taxpayers. However, concern appears to be growing among bond investors about the lack of engineering capacity in the company’s higher management structure.
“You don’t have engineers running the business,” said Scott. “You can appoint as many CAs [chartered accountants] as you want at Transnet, but that’s not going to fix the railway lines and ports. You need engineers.”
The majority of Transnet’s board of directors have qualifications related to finance, law and general business administration. The only two board members who appear to have engineering qualifications are independent nonexecutive directors Dimakatso Matshoga, who has a BSc in electronic engineering, and Aluwani Ramabulana, who has a BSc in chemical engineering.
CEO Portia Derby holds a BSc (honours) in economics as well as an MBA, while group CFO Nonkululeko Dlamini is a chartered accountant, as is nonexecutive director Gratitude Ramphaka.
Chair Popo Molefe is a former politician with qualifications in business leadership, conflict resolution and governance. Independent nonexecutive director Louis Leon von Zeuner is an ex-banker with a degree in economics. Independent nonexecutive director Mpho Letlape has a degree in computer science and psychology as well as a host of other qualifications in strategy and human resources.
Ursula Fikelepi is a legal consultant with degrees in law and business administration, while former politician Sydney Mufamadi holds a MSc and a PhD from the University of London. Mufamadi also holds an honorary doctorate in science from the same institution.
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