South Africa: Sasol debt plans improve long-term sustainability

By Xolisa Phillip, in Johannesburg

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Posted on May 25, 2023 09:15

Sasol in Secunda
A man walks past South African petro-chemical company Sasol’s synthetic fuel plant in Secunda, north of Johannesburg. REUTERS/Siphiwe Sibeko

Sasol will not have material debt maturities until 2026 – giving the company breathing room amidst a high interest rates environment, says ratings agency analysts.

Chemical and energy company, Sasol – whose operations have been beset by production challenges –  has also published an update showing moderate improvements and highlighting some persistent macroeconomic risks.
  • The Sandton-headquartered global integrated chemicals and energy company has refinanced existing banking facilities into a $2.9bn new facility comprising a $1.9bn revolving credit facility (RCF) and a $982m term loan facility.
  • The RCF and the term loan facility have a five-year maturity and come with two extension options of one year each. The listed company says the transaction was initially pitched at $2.5bn, but was subsequently raised to $2.9bn because of syndication oversubscription, with 14 banks making commitments.

Furthermore, Sasol embarked on a $1bn notes issue which closed on 3 May, with an 8.7% interest rate attached and a 2029 maturity. Sasol says the issuance was oversubscribed 2.3 times, and proceeds will go towards settling a $1bn note maturing in March 2024 and general corporate purposes.

In a market statement published on 28 April, Sasol CFO Hanré Rossouw explains how the recent activity forms part of efforts to proactively manage the company’s previously over-leveraged balance sheet and maintain a strong liquidity position.

Moody’s investors service analyst Iker Ballestero Barrutia says the upside of the facilities’ reorganisation is that “Sasol will not have any material debt maturities until 2026 as they have prefinanced the 2024 maturities”.

This will allow the company “to navigate the next two years of a high-interest rate environment relatively comfortably,” Barrutia says. The downside risk is “the company has slightly increased its cost of capital but, again, this will not have a material effect”.

Barrutia notes, however, that the refinancing continues to be in hard currency. This, Barrutia says, prolongs the relative mismatch between rand cash flows and dollar hard currency debt, which exposes Sasol to foreign exchange convertibility risks.

“Although the company will still aim to match these two in the long term, rand debt pricing is materially above the dollar market prices,” says Barrutia. Despite this, the company expects to ramp up operations in the US in the next three to four years, which will increase dollar cash flows and, therefore, reduce the cash flow and debt mismatch.

‘Leverage neutral’

Credit analysts at S&P Global Ratings say they view Sasol’s new debt package as “largely leverage neutral”, adding “it extends Sasol’s debt maturity schedule and improves its liquidity”.

According to the S&P credit analysts: “It also gives Sasol’s US operations time and headroom to complete the full production ramp-up of its Lake Charles [Chemicals] Project (LCCP).”

The full ramp-up is an important factor in boosting cash flows generated by the LCCP, and will improve Sasol’s ability to reduce and repay its dollar-denominated debt over time, say the S&P credit analysts.

Similar to Moody’s perspective, the S&P credit analysts say the refinancing will not materially affect Sasol’s cash flows. Also, the majority of Sasol’s debt remains dollar-denominated.

Credit profile

The analyst, who asked not to be named, said an interesting trend to note was the changing profile of the banking groups involved.

“The banking group has changed a bit over the last few years and, increasingly, is more Chinese, Japanese, and US – and less European. I think it’s down to their ESG [environment, social, and governance] issues.”

In a credit opinion report published in April, Moody’s says although Sasol has moderate governance risks the company has high environmental and social risks, which, over time, have the potential to pressure Sasol’s ratings.

As a global operator with a position of dominance in its founding market, Sasol is also vulnerable to commodity price volatility, the fluctuations in Brent crude oil, and country risks associated with the sovereign – South Africa.

However, Sasol’s credit profile is buttressed by strong management, the geographic diversification brought by the LCCP, and good liquidity. This holds the possibility of lifting Sasol’s credit ratings above those of the sovereign.

In the April report, Moody’s says: “Due to improvements in the company’s diversification profile and strong deleveraging track record, we believe Sasol has the potential to be rated one notch above South Africa’s sovereign rating.”

Production problems

On the production side, for the past two years, Sasol has published detailed operational updates about the challenges in the company’s mining business, which have affected coal volumes and quality.

The analyst says: “The production update, I thought was fine. It looks like things are slowly getting better. Second, that got better over the last quarter or so.”

But the core problem of not producing enough coal remains. A coal deficit limits Sasol’s ability to run the Secunda coal-to-liquids complex properly.

“They had a shutdown [at Secunda] in the first half which impacted the run rate,” says the analyst, adding, “the run rate [in the latest production update], I think, looks okay – it should be getting back to seven million tons [of coal] next year.

“On the macro, the oil price has come down – that’s put them under pressure. [But] you can see from the interest in the bonds things are reasonably up for them,” they say.

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