South Africa: Transnet redeems $1bn bullet bond maturity, but tackles liquidity challenges

Transnet disclosed the redemption on Wednesday (27 July 2022) at the group’s annual results presentation for the year ended 31 March 2022.

Public enterprises minister Pravin Gordhan, who attended the briefing virtually, noted the company’s “remarkable achievement” in “being able to raise money without government guarantees and being able to … return [to] financial credibility”.

Gordhan’s ministry is the shareholder representative for the South African government, which owns Transnet and other state-owned entities (SOE), including Denel, Eskom, and South African Airways, on which the minister exercises oversight.

“Yesterday [Tuesday 26 July 2022] was a momentous day when Transnet paid back $1bn that had matured,” according to Gordhan.

In the period under review, Transnet also obtained an unqualified audit opinion, a key condition of its covenants, for the first time since 2018, when the new leadership took over and inherited an SOE plagued by a legacy of state capture.

“In the period ahead, the management and staff, together with the board, need to focus and ensure that… further enhancement of the financial sustainability of Transnet is obtained,” says Gordhan.

According to Transnet CFO Nonkululeko Dlamini: “The bond maturity was watched by the investor community. We got a lot of enquiries about progress. We are grateful we were able to redeem that bond successfully.”

“We’ve got joint lead arrangers. We are grateful for the hard work they put in to ensure that we are not in a default position as Transnet,” says Dlamini.

“They [joint lead arrangers] will continue to work with us … to be active in the international bond market,” Dlamini says.

In the financial year ended 31 March 2022, Transnet’s operating divisions – Freight Rail, Port Terminals, National Ports Authority, Engineering, and Pipelines:

• Generated R68.5bn in revenue compared to R67.2bn, representing a 1.8% increase.
• Recorded net operating expenses amounting to R45bn, down 5.9%.
• Reported a bottom-line profit of R5bn, an improvement from the company’s R8.7bn loss in 2021.

Liquidity risk

Sovereign credit ratings agencies consider government guarantees, deemed continent liabilities on South Africa’s debt profile, a drain on the country’s public finances.

S&P Global Ratings, which had placed Transnet on credit watch in November 2021, citing the impending $1bn bond maturity, lifted the credit watch on the SOE. However, the ratings agency retained its negative outlook on the company.

We are working with them [Moody’s] now that we have successfully redeemed that maturity.

 “We got feedback from S&P on Monday (25 July 2022) that they were lifting the credit watch. We remain on negative outlook with them,” says Dlamini.

“Recently, Moody’s [Investors Service] took a view to put us on negative watch. [This] … was at the time when we were getting close to the maturity,” according to Dlamini.

“We are working with them [Moody’s] now that we have successfully redeemed that maturity,” says Dlamini.

S&P remains concerned about Transnet’s liquidity, which the credit ratings agency categorises as less than adequate.

In the event S&P considered Transnet’s liquidity position weak that could trigger a double-notch downgrade of the company, according to the ratings agency.

 “Transnet’s liquidity headroom is likely to remain less than adequate over the next 12 months as the company continues to execute on its funding initiatives, and financial headroom remains tight,” says S&P.

 “Our liquidity position is no secret,” says Group CEO Portia Derby. “That’s the next war that we have to fight.”

“We have to generate revenue from our operations. It’s a discussion that we’re having right across the board. We’re focusing on cutting costs that make no sense,” according to Derby.

Dlamini says liquidity management is going to be a focus area to ensure that Transnet reaches “comfortable levels.”

When they steal the cable, it doesn’t matter whether they steal 30cm, 1m, it has exactly the same disastrous impact on the supply chain.

“We will continue being active in the capital markets. We hope that, after these results, we will be out locally and internationally, raising bonds, loans, and other sources of funding. We are [also] going to be focusing on off-balance sheet funding structures,” Dlamini says.

Network vandalism

On the operational side, infrastructure sabotage and vandalism – most notably cable, rail network track, and overhead signalling system theft – remain challenges for Transnet. Last year, Transnet experienced the loss of 1,500km of cable.

“When they steal the cable, it doesn’t matter whether they steal 30cm, 1m, it has exactly the same disastrous impact on the supply chain,” Derby says.

“It [cable theft] has a massive, unfortunate impact on the performance of the system. We often have people say, ‘you should improve your operational performance.’ We’re doing everything we can,” according to Derby.

“Until we break the back of cable theft, we are really in trouble,” Derby says.

The issue is receiving attention from the government. According to Gordhan: “I hope that, soon, government will announce new measures to be undertaken in order to curtail cable theft, in particular curtail the export of stolen material.”

In terms of governance, the company is addressing the after effects of state capture. Says Gordhan: “[Transnet], together with other parts of government, will be collating responses [to the Zondo Commission reports] so that the president [Cyril Ramaphosa] can deliver to parliament, as he has undertaken, a consolidated set of actions that government will take to respond to the findings of the Commission.”