Moody’s lowers Transnet rating outlook to negative
Ratings agency flags R52.5bn of Transnet debt and potential difficulties in repaying it
Ratings agency Moody’s Investors Service changed Transnet’s outlook to negative from stable because of R52.5bn of the rail utility’s debt maturing in the next few years and its weakened liquidity position.
Moody’s affirmed all Transnet’s ratings, including its Baa3 senior unsecured rating, on Thursday. The negative rating is unlikely to change and is tied to SA’s sovereign rating, which Moody’s is watching closely. Transnet’s ratings are at investment grade.
“The ratings are likely to be downgraded in the event of a downgrade of SA’s government bond rating, given Moody’s assessment of a strong link between the two,” it said.
Moody’s is the only one of the three major ratings agencies that has not assigned SA junk status. Its next review is on November 1.
Transnet’s annual results, released at the end of September, gave insight into the group’s debt, its enormous jump in irregular expenditure to R49bn from R8bn, and its ability to service debt due to constrained free cash flows.
Event risks, such as the recent qualified audit opinion on the financial statements for fiscal year ended March 31 2019, make the company’s credit profile vulnerable given the need to maintain strong access to the debt market.
“Event risks, such as the recent qualified audit opinion on the financial statements for fiscal year ended March 31 2019, make the company’s credit profile vulnerable given the need to maintain strong access to the debt market,” Moody’s said on Thursday.
Transnet has R52.5bn of debt maturing between now and March 2023, it said, pointing out the utility has an increased reliance on refinancing activities because of this.
Transnet acting CFO Mark Gregg-McDonald said capital expenditure would be lower than planned, while cash flows remained positive.
“The debt redemption over the coming years is fully catered for in our funding plan, which is being tightly managed to ensure that the timing of new debt is aligned to the timing of the actual need, rather than incurring new debt ahead of the need to do so,” he said.
“As a result, we expect current year finance costs to be approximately R1bn lower than planned,” he said.
In the full-year results released in September, Moody’s noted Transnet had reported adjusted operating cash flow of R20.3bn against capital expenditure of R18.6bn, “leaving little free cash flow available to repay debt”. In the financial year to end-March 2020, Transnet has R8.5bn worth of debt maturing and no undrawn facilities it can tap into.
By the end of March, Transnet had raised R6.2bn to bolster its balance sheet, which holds R127.7bn of total debt, of which just 2.7% is guaranteed by the government.
At Transnet’s annual results presentation on September 30, acting group CEO Mohammed Mahomedy said there is disagreement with external auditors over R1.9bn of irregular expenditure out of the total, which ballooned to R49bn from R8bn in the previous comparable period.
Transnet included its entire locomotive procurement programme of R41bn since 2012 in irregular expenditure because of a review that showed aspects of the contracts were flawed, despite the delivery and use of many of those locomotives.
Transnet reported an increase in post-tax profit for the year to end-March of R6.05bn from R4.9bn.
Moody’s said the qualified audit opinion, which was “technical in nature” stemming from the irregular expenditure, had consequences.
“The inability of the external auditor to accurately quantify the amount of such expenditures has led to the qualified opinion. The unintended consequence of this is the triggering of an event of default under R13.9bn of borrowings,” Moody’s said, adding that this represents about 11% of Transnet’s total debt.
Transnet said it is “seeking waivers from lenders”.