Transnet’s latest capital raise in the debt capital markets was nine times oversubscribed, underlying growing investor confidence in turnaround efforts of the freight and rail group despite the downgrade of its baseline credit assessment three months ago by Moody’s.
The debt capital raised R5bn under the state-owned company’s R80bn domestic medium-term note programme. The notes are guaranteed by the government.
It is the market’s demand to participate in the underscored renewed investor appetite in Transnet following the government’s unequivocal financial support to the entity over the past two years.
Standard Bank acted as a joint lead arranger in the transaction, which attracted interest from more than 40 investors, with the Sim Tshabalala-led group facilitating more than R3.5bn from international participants.
The high demand put Transnet in a position to negotiate a better deal, compressing its funding curve by approximately 60 basis points.
Sabelo Mbuthu, head of DCM and distribution, said the result of the transaction signalled growing investor confidence in Transnet and the broader public sector.
“This outcome reflects strong investor demand and demonstrates the bond market’s reliability in helping Transnet meet its funding goals,” Mbuthu said.
The growing market demand will be crucial, as Transnet seeks to invest about R125bn in its operations and infrastructure over the next five years to meet the target to move 250-million tonnes of cargo by 2030, from the current 160-million tonnes.
In September, Transnet group CEO Michelle Phillips told Gulf investors the state-owned group was open for business and on a path to recovery, as it prepared to usher in the biggest reform in its history — one that would see the private sector play a far greater role in its operations.
Phillips was in Dubai in September for Standard Bank’s State-Owned Companies Investment Summit, making a business case to international investors to back the company, which is indispensable to SA’s ports, rail and pipeline infrastructure.
Transnet’s year-ended March results showed it was making headway in its turnaround blueprint, narrowing losses to R1.9bn compared to R7.3bn in the prior financial year — an improvement of 74%.
The group, which has an R144bn debt pile, is overly reliant on government guarantees to meet its debt obligations. In July, the government approved an additional R94.8bn to cover debt redemptions over five years and mitigate risks from credit downgrades. That followed an approval of R51bn in guarantees in May to fund capital investments and manage liquidity.
In August, ratings agency Moody’s 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.
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.
Transnet has been forging ahead with its private sector participation programme and recently announced the first 11 train operating companies, which are now negotiating with the Transnet Rail Infrastructure Manager (TRIM) regarding network access.
Transnet’s efforts to improve efficiencies got a major boost last month when the Durban high court gave its flagship multibillion-rand private sector participation contract to operate the Durban Pier 2 terminal (DCT2) the green light.
The contract, awarded to International Container Terminal Services Incorporated (ICTSI) was challenged by the losing bidder, APM Terminals.
ICTSI’s R11bn deal for half of DCT2 is R2bn more than that of APM Terminals. DCT2 is Transnet’s biggest container terminal, handling 72% of the Port of Durban’s throughput and 46% of SA’s port traffic.
The infrastructure and design of DCT2 have remained the same since 1963. Over the past 20 years, congestion at the terminal due to shipping traffic and limited operational capacity has led to backlogs at the Port of Durban.
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