Ratings agency S&P Global has put cash-strapped Transnet on CreditWatch, putting the entity at greater risk of a credit downgrade just months after National Treasury said it would not grant further bailouts to state-owned entities (SOEs), including the freight and rail group.
S&P in its latest review on Transnet said while it expected the entity’s operational performance to improve, this would not be completed by robust growth in cash flow, with the group’s capital expenditure requirements and debt servicing costs remaining elevated, and in its view “leaving limited room for operational underperformance”.
S&P said it expected the government, as Transnet’s shareholder, to grant it further financial support to transform its capital structure, fund capital expenditure and meet upcoming debt maturities. This is as S&P expected Transnet’s debt pile to hit the R150bn mark by the end of next year.
“We continue to see a very high likelihood of Transnet receiving extraordinary support from the government,” S&P said.
“The CreditWatch placement reflects the increased likelihood of a downgrade if the anticipated turnaround in Transnet’s business performance and cash flow generation does not materialise soon enough to control the current leverage levels and capital structure.”
S&P is the latest high-profile pundit to call into question the promises of finance minister Enoch Godongwana to cut off SOEs from state support.
A credit downgrade for Transnet will be disastrous for those looking to get it back up on its feet after years of underperformance, which has hamstrung economic growth.
S&P said it could take a negative rating action over the coming months if Transnet did not have a “firm and viable plan to reduce leverage” and the rating could improve if the entity enhanced its cash flows.
“In resolving the CreditWatch, we will also determine if Transnet’s balance sheet optimisation plan and/or additional government support are in our view credible and sufficient to achieve a long-term capital structure commensurate with our BB- issuer credit rating.”
Guarantee
In December 2023, Transnet received a R47bn guarantee from the National Treasury to make it easier for the entity to raise capital from the market. This was a month after the government had said no bailouts were on the cards for Transnet. Its year-old appeal to the government, its sole shareholder, for the restructuring of more than R61bn in debt and an injection of R47bn in equity remains unapproved.
Transnet is in desperate need of recapitalising its infrastructure to R150bn and needs fiscal support to lighten its R1bn a month interest burden.
We estimate Transnet’s gross debt could increase to about R151bn by the end of fiscal 2025 from R134.7bn at the end of fiscal 2024. Consequently, we estimate the company’s annual interest expense will remain high at R15bn to R17bn.
— Ratings agency S&P Global
S&P expects the debt-service burden to surge as the group takes up more debt.
“We estimate Transnet’s gross debt could increase to about R151bn by the end of fiscal 2025 from R134.7bn at the end of fiscal 2024. Consequently, we estimate the company’s annual interest expense will remain high at R15bn to R17bn. At the same time, high annual capex (R26.5bn in fiscal 2025 and R30.5bn in fiscal 2026) will result in the company generating negative annual S&P Global Ratings-adjusted FOCF [free operating cash flow] of R15bn to R16bn,” it said.
“Therefore we expect Transnet’s cash flow will not improve sufficiently or quickly enough to retain a long-term capital structure commensurate with our BB-’issuer credit rating.
“We also think our forecast level of cash generation leaves management with limited room for operational underperformance.”
Transnet has experienced gradual performance improvement as it implements its turnaround strategy announced a year ago.
In the 2023/24 financial year, the company moved 151.7-million tonnes of goods through its rail network, a 1.5% increase from the 149.5-million tonnes it moved in the previous year.
Transnet group CEO Michelle Phillips said S&P’s rating decision reinforced the urgency for Transnet to ensure its long-term viability by adequately addressing current leverage levels and capital structure challenges.
“S&P’s decision comes while the company is implementing a recovery plan approved by the Transnet board in October 2023 with the aim of improving operational and financial performance of the company,” Phillips said.
Interventions
Through the recovery plan, Transnet was implementing a series of focused interventions to improve operational and financial performance, she said.
“The steps towards the desired financial recovery and operational excellence include improving the availability and reliability of rolling stock and rail network infrastructure and implementing operational excellence initiatives to improve productivity, reduce downtime and enhance service delivery,” Phillips said.
“This reinforces the significance and urgency of Transnet’s ongoing initiatives to address operational and financial challenges and position the organisation as an enabler of economic growth.”
Over the next few months Transnet management would “update S&P regularly on the progress made around addressing the concerns on operational and financial performance, capital investment plans and capital structure of Transnet”, Phillips said.
S&P recently upgraded Eskom’s long-term ratings from stable to positive.
The ratings agency surprised last month when it upgraded SA’s sovereign rating outlook from stable to positive after increased political stability after the formation of the government of national unity.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.