Capital markets give Transnet the thumbs-up
The state-owned rail and port utility has nearly secured all its funding requirements until March 2021, despite ratings agencies’ misgivings
Transnet’s recent ventures into the capital market have met with a positive response, SA’s state-owned rail and port utility’s acting CFO Mark Gregg-Macdonald said in parliament on Wednesday.
This was despite the view of ratings agency Moody’s Investors Services, which recently downgraded Transnet’s outlook from stable to negative while keeping its investment grade credit rating. The parastatal is one of the important cogs in the infrastructure needed for President Cyril Ramaphosa’s $100bn investment drive, as functional rail and harbours are integral to imports and exports.
Gregg-Macdonald said Transnet is now engaging with S&P, which he said also seems to have a negative approach towards the rail, ports, freight and logistics group.
In 2017, at the height of state capture, the investor community placed an embargo on trading in Transnet bonds due to their unhappiness over various governance issues.
Gregg-Macdonald told members of the National Council of Provinces’ select committee on public enterprises and communications that the group had been through a major process of cleaning up that included the appointment of a new board in May 2018, the launch of a number of investigations into irregular transactions, and undertaking disciplinary actions against those implicated. Legal action and civil claims have also been instituted against companies and former employees allegedly involved in state capture.
This, together with good financial results both for the year to end-March and the interim results to end-September, enabled Transnet to make its bonds available to the market again to test if there was an appetite for them.
In October, Transnet invited those interested in purchasing its bonds to contact its treasury department. “We issued R900m within three weeks while demand was closer to R3bn, but we didn’t need all the funding so we did not issue out the full demand,” Gregg-Macdonald said.
On Monday, an auction was conducted for R250m for bonds with maturity dates of 2030 and 2040, which was more than three-times oversubscribed. Bids were received for R790m. Also this month, Transnet signed a rand-based loan agreement with a German bank and is negotiating funding with local banks.
“From a financial sustainability and funding perspective we are not in any way near some of the other state-owned enterprises (SOEs),” Gregg-Macdonald said. “Once we have signed these loan agreements in place we will not need funding until March 2021.”
Addressing the approach of the credit ratings agencies Gregg-Macdonald said they wanted Transnet to borrow money for all the debt repayments due for the year ahead in advance. This involves about R15bn, but borrowing in advance means paying large sums in interest payments when not all the money is immediately needed.
“It is a balancing act in that on one hand we want to pay less finance costs and manage the business commercially, [on the other] you want to satisfy a ratings agency. Trying to do both is a bit difficult.”
A negative assessment by a credit ratings agency has negative implications in that it increases finance costs, but this would be nowhere near the cost of borrowing all the repayment money upfront. “This is a reality we have to manage,” Gregg-Macdonald said.
In the six months to end-September, Transnet increased its revenue by 2.9% to R38.7bn and profit by 3.5% to R2.9bn.