Transnet signs $1.5bn five-year loan just in time to probably stave off Moody’s downgrade

Transnet has successfully re-entered the international syndicated loan market by signing a five-year senior unsecured term loan facility of up to $1.5-billion (R25.7-billion) led by Deutsche Bank. The facility will be used by Transnet to finance its capital expansion programme and refinance existing debt in line with Transnet’s 2022/23 funding plan. More importantly, it will probably stave off a Moody’s downgrade. 

The first drawdown, amounting to $685-million, is scheduled for this month. The facility is structured to be repaid in eight equal semi-annual instalments after a 12-month grace period. There is an accordion feature in the transaction for up to $1.5-billion, subject to Transnet’s consent, until December. This allows the borrower to add a new term loan tranche or increase the revolving credit loan commitments under an existing loan facility up to a specified amount under certain terms and conditions. Given the accordion feature, Transnet will have about $800-million available for drawdown up until 31 December, subject to market conditions and investor appetite.

The transaction saw participation from a number of investors and development finance institutions, demonstrating confidence in Transnet and expanding the company’s investor base. The institutions included Deutsche Bank as global coordinator, bookrunner and arranger, Africa Finance Corporation as bookrunner and arranger, African Export-Import Bank as bookrunner and arranger and Ahli United Bank as lead manager.

Commenting on the transaction, Transnet’s group chief financial officer, Nonkululeko Dlamini, said: “This is a significant milestone to stabilise Transnet’s liquidity position in support of our financial sustainability. It has been the single largest funding transaction which Transnet has been able to secure in the last seven years with the benefit of diversifying our investor base in the process. The confidence that these investors have demonstrated is encouraging and we continue to focus on improving the operational and financial performance of Transnet.”

However, just last month, credit rating agency Moody’s placed Transnet on review for a downgrade, based on concerns over the company’s exposure to weak liquidity management and high refinancing risk. Transnet has a $1-billion international bond maturity on 26 July and did not have sufficient committed liquidity sources to repay this maturity. Moody’s did note that the risk of Transnet defaulting on the $1-billion bond in July was low given that it was in negotiations for credit facilities, which have now borne fruit.

However, other concerns Moody’s raised included financial policies and governance, from a financial management perspective, particularly when combined with the exposure the company has had to weak compliance and reporting arising from legacy issues. 

“These weaknesses include the company’s repeated delays in publishing audited financial statements, its inability to obtain unqualified audit opinions and recurring breaches of debt covenants,” says the note from Moody’s. However, over the past two years, a new management team has taken over, including new chief executive, Portia Derby, and new chief financial officer, Nonkululeko Dlamini. 

Futuregrowth investment analyst Lindani Vezi says the loan is welcome news in the market, signalling funding for “all-important infrastructure projects” that are sorely needed as South Africa continues a slow recovery from rising inflation, an increasing interest rate cycle and, more importantly, major infrastructure damage in KwaZulu-Natal following riots and then floods. 

Despite the size of the loan, Vezi believes Transnet is likely to come back to the market for more funding. 

“Transnet is actually one of those state-owned enterprises that is big for our local capital market. So they need to access both local and international capital markets in order to be able to adequately fund the business,” she says. 

“Weak financial and liquidity risk management are particularly concerning as Transnet will continue to face substantial refinancing risk over the next six to 18 months if the $1-billion bond maturity in July is redeemed with short-term financing,” Moody’s said last month. 

As of the end of May, Transnet had about R1.3-billion of cash on the balance sheet against debt maturities of R23.5-billion until March 2023. The company had also drawn down R8.7-billion of call loans, which most lenders can cancel at any time upon 365 days’ notice, but that Moody’s largely expected to be rolled over, as has happened previously. Out of the R23.5-billion maturities in the year to the end of March 2023, R16.2-billion is due by the end of July 2022, primarily in the form of the $1-billion international bond. 

Moody’s also noted that the operating environment in South Africa had improved thanks to high commodity prices and increased international demand for some of the main commodities that Transnet transports, in the wake of Russia’s war in Ukraine, including coal and manganese. 

“Nevertheless, Transnet has been unable to benefit from the improved environment and remains unable to fulfil some of its contractual requirements with commodity exporters, mainly due to capacity constraints in its freight rail division. 

“Constraints are caused by a combination of availability of fewer operational locomotives, cable theft and vandalism, environmental disruptions, and speed constraints due to inadequate maintenance,” the rating agency said. 

Moody’s expects it will take at least two to three years for the company to recover to its pre-pandemic operating performance, while investment requirements remain high with limited ability for reductions or deferrals, and a higher interest rate environment and higher risk credit profile will increase Transnet’s cost of debt. 

Moody’s expects a sustainable recovery will depend on some level of operational and organisational restructuring, such as public-private partnerships or asset sales. DM/BM