CHRIS BARRON: Transnet recovery needs more steam

Government guarantees are a necessary stopgap for a Transnet choking in debt, but they do not address what lies at the heart of its crisis, says Olga Constantatos, head of credit for Transnet bondholder Futuregrowth. 

“The issuance of more and more government guarantees is a short-term reprieve but doesn’t solve the problem in the end, as we saw with Eskom,” she says.

Transnet, which ratings agency S&P predicts will be more than R150bn in debt by year-end, received a R47bn government guarantee in December 2023 and R51bn last month with another apparently in the pipeline.

“Eskom should be a warning to government about relying on endless guarantees to solve crises,” says Constantatos.

Transnet’s reform initiatives “are all very good and positive but are going to take a lot of time”.

“Meantime there are a lot of things Transnet needs to do and it doesn’t have the balance sheet flexibility right now. So it's a little bit of kicking the can down the road, but eventually you have to get to the end of the road and deal with Transnet’s unsustainable capital structure,” Constantatos says. 

“Government guarantees can solve that in the short term, but what’s the long term fix here? That’s where we don’t have good line of sight or clarity from the shareholder, the government.”

One solution is equity injection, she says. But the government has made it clear it will not be giving Transnet any equity, and privatisation is not an option even if the government agreed to it.

Transnet is unlistable in its current state. Its debt-riddled capital structure, among other things, would have to be sorted out before it could ask anybody to invest, says Constantatos.

“Partial privatisation is what I think they’re trying to do with their reform programme. To concession off parts of rail and ports infrastructure to private players to operate.”

Transnet would get some form of tariff and those who put up the capital to improve infrastructure would get a return. That would allow Transnet to push through volumes and generate more earnings before interest, taxes, depreciation and amortisation.

“That’s kind of the path, but that takes a long time. Particularly because of the regulatory framework and because anything involving the government takes a long time,” says Constantatos.

The government should be lauded for undertaking the reform process and doing what it’s done, she says. But meantime Transnet’s capital generation is limited and it’s “choking a bit in the context of debt”.

Government guarantees provide Transnet with breathing room. They are a short-term fix, but necessary.

Transnet’s challenge at the moment is that it’s got big upcoming maturities, meaning big chunks of capital are needing to be repaid.

—  Olga Constantatos, head of credit for Futuregrowth

“Transnet’s challenge at the moment is that it’s got big upcoming maturities, meaning big chunks of capital are needing to be repaid. And whoever’s funding that, debt capital markets or banks, they need to be repaid in terms of the underlying loan agreements. The maturity date is August 2025 when a good few billion is due.”

Transnet doesn’t have the cash flow generation so it needs to refinance those loans. Because of its unsustainable capital structure the only way is through government guarantees. On a stand-alone basis it is "very difficult" to make an investment case for lending money to Transnet, Constantatos says. 

While guarantees can be a useful mechanism if used to give Transnet breathing room to let it recover, the question is how long that recovery will take.

“They’re not a long-term solution, so what’s the path to recovery?”

Constantatos points out that Transnet’s March year-end volume numbers were marginally up from the year before but nowhere near where they were projected to be.

“So the difficult question is when are these reforms going to start trickling through to better numbers so they can start self-funding and don’t need government guarantees anymore?

“Nobody seems to know the answer. What we do know is that these reforms are taking a long time.”

The costs to the economy of not addressing Transnet’s challenges are huge, Constantatos says, and she is encouraged that transport minister Barbara Creecy, Operation Vulindlela and the national logistics crisis committee are paying attention to this. But it’s all happening too slowly.

“It’s not always clear to us from the outside how much quicker these processes could be moving. If you think back a year ago, yes, we’ve made a lot of progress. But could we have made more progress? I just don’t know.”

What she does know is that in the meantime Transnet is operating with a debt-ridden capital structure that could pose an existential threat if not addressed.

“It’s become a bit of a ticking time bomb because until so late in the day no-one was paying any attention to it. Now there are kind of fixes and plasters being attached, but it doesn’t take away the need for some broader trade-offs. Maybe we can delay this for a little while but there will come a point where trade-offs need to happen.”

There are still too many regulatory and legislative hurdles in the way.

“I think they are moving ahead now with a fair degree of urgency. I don’t know the ins and outs of which government departments need to sign off on what things. I would like to believe they are applying the necessary urgency and focus to this matter. It’s tricky to know from the outside how much quicker they could be moving.”

Accelerating Transnet’s operational turnaround is non-negotiable, she says.

“Given the extent of debt on their balance sheet, it’s simply not happening fast enough. They don’t have a lot of breathing room. Government guarantees give them this, but at some point there has to be a reckoning because guarantees are not a long-term, sustainable solution.

“To the extent the reform process takes a lot longer or doesn’t result in the kind of cash flows that are needed for Transnet to self correct its capital structure, what happens in that scenario? That’s the piece that is not clear at this stage.”