S&P Global Ratings expects Transnet to burn cash over the next three years and says the government’s “extraordinary support” of the entity due to its importance to the SA economy is key to keeping it afloat.
The agency said the end result will be that the freight and rail group, indispensable to SA’s economy, is likely to miss its target to move 250-million tonnes of freight by 2030.
The agency downgraded its rating, saying this reflects Transnet’s unsustainable capital structure without government support.
“Transnet has missed targets in the past based on insufficient maintenance capex and security issues,” Omega Collocott from S&P Global Ratings told Business Day.
“Given the extent of network rehabilitation required due to maintenance backlogs, aged infrastructure and ongoing security incidents, we expect TFR [Transnet Freight Rail] volume recovery to fall short of budgeted projections under our base case,” she said.
“Based on our updated forecasts, we think that Transnet’s credit metrics will remain weak over fiscal years 2025 and 2026 (ending March 31), despite gradual improvement in volumes.”
Collocott said the rating action was also due to the substantial cash burn it expected from the entity in the next few years, and covenant breaches.
“While our base case considers operational cash flow improvement over the 12 months from April 1 2025, supported by a gradual recovery in port and rail volumes, we see limited headroom under cash interest cover covenant likely persisting due to elevated net finance costs,” Collocott said.
“Under our base case, we expect Transnet to burn cash until 2028, at least, given large and critical capex needs.”
The government stepped in with a R51bn guarantee for Transnet in June, providing a lifeline as the entity was expected to run out of cash within three months. Guarantee packages comprise R41bn for the 2026 and 2027 fiscal years and R10bn for liquidity management.
A portion has already gone to settling a multiyear tariff dispute with Sasol. Transnet agreed to pay Sasol nearly R5bn in an out-of-court settlement agreement. Sasol had the upper hand before the settlement discussion after the high court in 2024 ordered Transnet to pay Sasol R6.2bn, inclusive of interest, with TotalEnergies set for a R2.3bn windfall.
S&P welcomed the guarantee, saying it would enable Transnet to refinance its upcoming debt maturities by R18.9bn in fiscal 2026 and R11.4bn in the 2027 financial year.
Despite welcoming the latest guarantee, S&P said in its view Transnet was now exposed to greater negative free cash flows than in previous years.
The agency said this constrains the company’s ability to service debt excluding government support, and “severely undermines its stand-alone deleveraging capacity at a time when its debt servicing burden remains exceptionally high”.
Slower pace
Under the S&P base-case scenario, Transnet’s free cash flow deficit will only begin to moderate in fiscal 2027, “contingent upon a continued sequential improvement in volumes, though at a slower pace than management plans”, the agency warned.
“We regard Transnet as a government-related entity with a very high likelihood of receiving extraordinary support from the state, if needed,” it said.
“The fundamental business weaknesses, notably substantial cash burn and elevated leverage, remain a concern. In terms of structural solutions to improve Transnet’s capital structure, the government intends to work extensively with Transnet over the next five years,” S&P said.
“However, we consider that in the absence of equity support from the government, any meaningful and sustainable transformation of Transnet’s capital structure will be protracted, with constrained prospects for meaningful balance sheet strengthening and sustainable credit metric improvement.”
The R51bn guarantee is on top of the R47bn guarantee it received from the National Treasury in December 2023.
The department of transport has initiated a process to allocate additional guarantees in view of the state-owned enterprise’s R99.6bn debt redemptions that become payable over the next five years as the group grapples with a debt pile of more than R130bn.
Michelle Phillips, group CEO of Transnet, said the company had made strides to improve the entity’s operational and financial challenges.
“This will enable Transnet to deleverage its balance sheet and focus on optimising its capital investment programme to restore the network. The government guarantees will be deployed to ensure that the appropriate level of liquidity is maintained to service all Transnet’s obligations,” Phillips said.
“We have noted the ratings action by S&P Ratings and our immediate and ongoing focus includes actively implementing the focused interventions to enhance our operational and financial performance.”
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