Transnet’s plan to register a $6bn (R103.32bn) global note programme may be a sign that it is trying to reduce its reliance on a local capital market that seems increasingly wary of lending to dysfunctional state-owned entities (SOEs).
That is clear from the sheer size of the mooted programme, which equates to about 81% of the R128bn debt load Transnet had at end-September 2022 (of which about R20bn is in the form of foreign bilateral lending facilities). The general rule of thumb for companies with rand-based earnings is that foreign debt should ideally not be more than 20% of their total debt.
Of course, Transnet will not tap the entire $6bn programme immediately and could technically end up not even using all of it (though that is unlikely). However, merely looking to register a programme of such size is an indication of its expected long-term offshore borrowing requirements.
Given the scale of investment needed to revitalise Transnet’s ageing infrastructure, we should perhaps not be surprised that it is looking to borrow so much. What is concerning is how that $6bn will be repaid, given Transnet’s operational dysfunction and the penchant of SOEs to seek taxpayer-funded state bailouts whenever their finances go awry.
The size of Transnet’s offshore borrowing programme could also be a message to local fund managers that SOEs are quite happy to get their funding offshore if the local capital market becomes too recalcitrant. Rumours have been swirling in the local bond market that fund managers are less than sanguine about lending to SOEs given their state of dysfunction.
“They’re obviously trying to tap foreign capital pools because the local fund manager industry has a less than positive view on Transnet at the moment,” says Ian Scott, head of fixed income at Momentum Investments, which holds Transnet debt. “I think it’s going to be hard for them to borrow that size in the SA market without paying a high price through the [interest rate] spread or very strict governance requirements. Maybe they think the offshore market is more lenient than the local guys.”
Like most SOEs, Transnet and its senior management are under severe scrutiny.
Two months ago the Minerals Council, which represents SA’s mining industry, called for the sacking of CEO Portia Derby, saying Transnet’s struggling port and rail network was crippling mineral exports. Then last week it emerged that coal exports from the Richards Bay Coal Terminal had fallen to the lowest since 1993, which was attributed to cable theft and the unavailability of locomotives at Transnet Freight Rail (TFR).
Poor operational performance also hurts Transnet’s ability to earn the revenue it needs to repay its borrowings, something Moody’s alluded to in October 2022 when it flagged liquidity pressures that could hamper debt repayments coming due in the next 12 months.
Accessing another $6bn in potential future debt funding will only add more financial pressure on Transnet, which will have to repay that hard currency debt with rand-denominated revenue.
While forex hedging arrangements can help mitigate currency risk to some extent, one has to bear in mind that the rand has lost 28% against the dollar over the past five years. Transnet’s balance sheet is a tad better than some SOEs — it made R159m in profit in the six months to end-September 2022 — but its finances still worry local investors.
Chief among those concerns is Transnet’s failure to meet its cash interest cover (CIC) ratio of 2.5 times, meaning it is now in breach of debt covenants with some lenders. When Transnet released its half-year results in December 2022 its rolling CIC ratio was 2.1 times, something it blamed on the revenue effect of everything from the KwaZulu-Natal floods to fuel and cable theft and vandalism of its infrastructure.
“Once an SOE starts breaching debt covenants it’s going to have to give a very good reason we [asset managers] should add to our exposure to Transnet [debt],” said Scott.
Asked whether the CIC-related covenant breach was negatively affecting its relationship with the local capital market, Transnet stressed its willingness to continue working with local asset managers, describing them as a “significant stakeholder and investor base”.
“Transnet has strong relationships with the investor community and has been transparent on the CIC breach for some of its lenders,” it said in a statement. “The waivers secured by Transnet are evidence of the depth of our relationship with investors and lenders.”
Stephen Naidoo, a portfolio manager at Ninety One, says there are “positives” to Transnet’s plan to reduce its reliance on local funders by tapping the significantly deeper offshore credit market.
“A large local bond auction would typically see about R3bn of paper placed — offshore bond issuances are typically north of $500m,” says Naidoo, alluding to the minimum bond size Transnet would likely issue under a $6bn programme.
“Tapping offshore markets also diversifies Transnet’s funding base.”
Of greater concern is whether other SOEs will follow Transnet’s example by looking offshore for future debt funding. Contrary to popular belief, the dysfunction of local SOEs will not necessarily deter offshore funders entirely. Instead, they will simply ratchet up the interest rate they demand.
For taxpayers, the more pertinent concern is who will end up footing the bill if local SOEs load up on offshore debt only to find themselves unable to repay it. If the best predictor of future performance is past performance, that doesn’t paint a very pretty picture.
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