Downgrades fuel the surge in Transnet's interest payments
Transnet is paying about R400m to R500m more in interest annually than it was in 2016-17 because of sovereign credit ratings downgrades, the state-owned rail, freight and logistics company said on Wednesday.
The higher interest bill was negotiated with lenders as an alternative to their demand that Transnet debt be guaranteed by the state, which Transnet chief financial officer Garry Pita said the company wanted to avoid at all costs. Being 100% state-owned, Transnet was downgraded by ratings agencies along with the sovereign downgrade, though on a stand-alone basis it has an investment grade rating of BBB by Standard & Poor’s.
Transnet CEO Siyabonga Gama and Pita briefed Parliament’s public enterprises committee on the parastatal’s 2016-17 financial results. Transnet, which currently has about R125bn in debt, is able to borrow on the strength of its own balance sheet and has not had to resort to government guarantees since 1998-99.
Pita explained that because Transnet did not have government guarantees, lenders protected themselves by putting loan covenants for credit ratings into their loan agreements. These would be triggered when Transnet’s rating was downgraded to a particular notch. Those triggers were activated and lenders demanded government guarantees for the Transnet debt. Instead Transnet negotiated to pay higher interest rates as an alternative when these triggers came into play.
Of its total debt of R125bn in 2016-17, R30.1bn had triggers for credit ratings, and of this R29bn was renegotiated. These renegotiations started in May 2016 before the downgrade in April 2017 and are continuing in order to ensure the rating triggers do not entail any guarantees for the government or any prepayments. Pita said some lenders had removed the demand for government guarantees while others had not.
"When SA was downgraded we then had a trigger in our loan covenants, which meant that we would either have to give a government guarantee or immediately repay the debt. If you repay one, you have to repay everyone, which creates a big, big problem for the country. We renegotiated way before the downgrade. Lenders were comfortable with our credit risk and renegotiated the triggers."
Pita said Transnet had also managed to avoid prepayments or the acceleration of any of the loan repayments.
He noted that despite Transnet’s success in its negotiations with lenders, liquidity was very tight in the domestic market and, because of the ratings downgrade, borrowing had become far more expensive.
"Liquidity is very, very tight and it is a challenge on a daily basis," he said. Internationally there was appetite for emerging market debt whereas the domestic bond market was much more cautious towards parastatals. Transnet plans to raise R15.5bn in new funding in the 2018-19 financial year.
Gama emphasised the need for Transnet to clean up its reputation, which has been tarnished by allegations of irregular procurement. This was particularly important to enable Transnet to borrow from the financial markets.