Ratings agency Moody’s has downgraded Transnet’s baseline credit assessment (BCA), flagging high execution risks of the freight and rail group’s blueprint to slash debt via private sector participation as well as the group’s dependence on government guarantees to stay afloat.
Moody’s BCAs are essentially an opinion on the likelihood of an issuer requiring “extraordinary support to avoid a default on one or more of its debt obligations or actually defaulting on one or more of its debt obligations” in the absence of such extraordinary support.
However, in a statement on Thursday, Moody’s affirmed Transnet’s long-term corporate family rating (CFR) of Ba3, indicating renewed confidence in the group’s ability to meet its financial obligations given the guarantees received from government.
The agency downgraded Transnet BCA to caa1 — reflecting very high credit risk absent any support from government. However, the group’s ratings were assigned a stable tag.
“We have downgraded the BCA to caa1 to reflect Transnet’s persistent structural weaknesses. These include continued weak, albeit gradually improving, operating performance; an unsustainably high interest burden, which we view as indicative of an unsustainable capital structure,” Moody’s said in a rating action on Friday.
The agency also flagged “significant execution risk tied to the company’s plans to reduce debt through private sector participation” and the group’s inability to raise substantial financing without government support.
“Transnet’s debt burden remains excessively high, leading to unsustainably high interest payments. The company’s Moody’s-adjusted ebit (earnings before interest and tax) to interest coverage ratio remains at 0.6x [by] September 2024 and we do not expect it to reach 1x until at least March 2027. This means the company is unable to meet regular capital spending needs and interest payments from its earnings,” Moody’s said.
“Transnet’s continued operational turnaround and the structural reforms it is working on to facilitate private sector participation carry high execution risks, especially since the company’s progress on noncore asset sales and private sector participation has been slower than we initially expected.”
The state two weeks ago approved additional guarantees of R94.8bn for Transnet, taking the total amount of new government guarantees to R145.8bn, enough to cover all Transnet’s debt redemptions over nearly the next five years.
Transnet, indispensable to SA’s economy, has a debt-pile of more than R130bn. The new guarantees are on top of the previous R47bn guarantee facility provided at end-2023, which has been exhausted.
“We expect Transnet’s total debt will continue to slightly increase over the next two years, nevertheless, the company would then be able to refinance nearly its entire debt with government guarantees,” the ratings agency said.
“We believe this will significantly reduce Transnet’s refinancing risk and ensure it maintains an adequate liquidity profile while the company continues to progress with its operational turnaround plan.”
Government’s demonstrated support for Transnet via guarantees that cover nearly all the company’s debt saw Moody’s confirm Transnet’s CFR.
Moody’s CFRs are long-term ratings that reflect the relative likelihood of a default on a corporate family’s debt and debt-like obligations and the expected financial loss suffered in the event of default.
The agency upgraded Transnet’s national scale senior unsecured medium-term note (MTN) programme and the group’s national scale subordinated MTN programme.
The downgrade of just the BCA is an indicator of how far the generous government guarantees have gone in appeasing markets. However, a permanent solution to Transnet’s capital structure is still missing causing angst among the group’s bondholders.
In May, Moody’s placed most of Transnet SOC ratings on review for downgrade, including long term CFR, BCA, the probability of default rating and the global and national scale senior unsecured MTN programme.
Transnet group CEO Michelle Phillips said management is focused on improving the group’s operational performance, while also implementing port and rail reforms.
“With the support received from the shareholder in the form of government guarantees, we are confident that we can stabilise and improve Transnet’s credit ratings,” Phillips said.
S&P Global Ratings last month downgraded Transnet’s rating, saying it reflects Transnet’s unsustainable capital structure without government support.
S&P 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.
SA’s largest asset manager, Ninety One, said with reforms under way, Transnet was regaining credibility and unlocking opportunities for long term investors.
“For institutional lenders such as Ninety One, it’s been encouraging to see the recent developments at the department of transport and across the wider sector. After years of operational decline, Transnet is starting to show credible signs of a turnaround,” analysts of the company said in a note.
“For bondholders and infrastructure investors, the implications are significant. Government backing has underwritten Transnet’s recent issuances and mitigated refinancing risk. Free cash flow remains constrained, but improved volumes and capital discipline point to a medium-term deleveraging path,” they said.
“Beyond credit, Transnet is fast emerging as a platform for co-investment. From rolling stock and corridor upgrades to terminal concessions, the postcrisis environment is creating new bankable infrastructure opportunities.”
With Jacob Webster
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