Transnet’s acting management will be under pressure to effect a quick turnaround at SA’s failing port and rail network after the Treasury yielded to pressure for a bailout, providing a R47bn guarantee that will make it easier for Transnet to borrow and go to the market for capital.
The Treasury took many by surprise on Friday when it announced the package to support Transnet’s “recovery plan, including meeting its immediate debt obligations”.
Transnet had said at the release of its financial results in October that it needed a R100bn bailout. Finance minister Enoch Godongwana said in November’s medium-term budget policy statement that he would be willing to discuss it only once Transnet had included the government’s new logistics road map in its turnaround plan.
Conditions
Though the package announced on Friday is in the form of a guarantee rather than an equity injection, it comes with stringent conditions.
Rhandzo Mukansi, head of interest rate process at Futuregrowth, said the R47bn guarantee facility will increase Transnet’s existing guarantee facility to R50.5bn, or 0.7% of GDP, from the current R3.5bn, or 0.05% of economic output.
“This would not directly increase Treasury’s funding requirement, since a direct equity injection has not yet been provided. An increasing contingent liability risk, which is brought about by increases in Transnet’s guarantee facility, would be considered negative by the bond market and bears the risk of being crystallised if Transnet is unable to effectively implement its turnaround plan,” Mukansi said.
Old Mutual-owned Futuregrowth, one of SA’s biggest institutional investors in the bond market, also cast doubt on the turnaround plan announced by Transnet’s board in October, saying the lack of locomotives will derail whatever plan the top brass devises.
Transnet has since 2019 been struggling to get spare parts for trains it bought in the controversial 1,064 locomotives deal with the Chinese Railway Rolling Stock Corporation because the Chinese refuse to supply parts.
The locomotives were intended for use on the coal, chrome and manganese lines, which account for about 50% of Transnet Freight Rail’s revenue.
The company, which made a R5.7bn loss for the year to March, asked the government to take over R61bn of its debt and inject R47bn of equity.
Recovery plan
However, the Treasury emphasised on Friday that the guarantee is not equity, given that the budget for 2023/24 has already closed. But it said it is confident the guarantee facility, with swift implementation of the Transnet recovery plan, will be sufficient to resolve Transnet’s challenges.
Transnet will draw down an initial R22.8bn to deal with immediate liquidity matters such as settling maturing debt.
Olga Constantatos, head of credit at Futuregrowth, said the provision of the guarantee for Transnet appears to deviate from the Treasury’s intention to reduce government guarantees.
“The announcement indicates that an initial R22bn of the guarantee will be immediately available, which seems to indicate that Transnet’s liquidity is very tight for the next few months, and they [probably] need support before the conclusion of any equity allocations that may be made in the 2024 budget processes,” she said.
“While we recognise the need to address the short-term liquidity squeeze, a more sustainable solution needs to be urgently implemented, including rightsizing Transnet’s balance sheet and gearing, addressing its severe and ongoing operational challenges and concluding the necessary C-suite appointments with suitably qualified and experienced people.”
The entity, which is sitting on a R130bn debt pile, has no permanent CEO after Portia Derby left the role a few months ago alongside CFO Nonkululeko Dlamini. Siza Mzimela, head of the company’s biggest unit, Transnet Freight Rail, also fell on her sword.
Favourable
But acting CEO Michelle Phillips is getting favourable reviews from Transnet’s customers.
Andrew Bahlmann, CEO at Deal Leaders International, said the government had no choice but to provide the guarantee because of the damage Transnet’s inefficiencies are inflicting on the economy, particularly the export markets.
“I do not believe anyone thought that anything but a Transnet bailout would ultimately materialise.
“But the already harsh public spotlight that is on Transnet will only become more focused in the wake of this support package,” he said.
“The business and investment community will expect to see some immediate improvements in port delays and rail performance to feel the financial package is justifiable or [whether it is] just good money thrown after bad.”
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