Credit rating agency Moody’s has placed most of Transnet’s credit ratings on watch for downgrade.
Moody’s says it is increasingly concerned about Transnet’s exposure to poor liquidity management and high rollover risk.
Transnet has a $1 billion international bond that matures next month, but currently does not have sufficient funds to repay bondholders. Transnet only had around R1.3 billion of cash on its balance sheet and will have to pay bondholders R23.5 billion as more bonds mature until March 2023.
The company planned to redeem the bond which matures next month with a new $1 billion international bond issue in the coming weeks.
“However, Moody’s believes that issuing a sufficiently large international bond before the July deadline is becoming increasingly difficult given current market conditions,” the agency said in a statement.
Nonetheless, he believes that a risk of default in July remains low as Transnet is in an advanced stage of securing binding commitments for credit facilities from a diverse group of lenders, which Moody’s says will be available. before the July 26 deadline. Moody’s also believes the government will provide “strong” support, if needed.
Still, Moody’s says the delay in securing refinancing commitments has raised concerns about Transnet’s financial policies and governance, which has added to its unease with weak compliance and reporting.
These weaknesses include the company’s repeated delays in issuing audited financial statements, its inability to obtain unqualified audit opinions, and recurring covenant violations.
In addition, Moody’s does not expect a significant recovery in Transnet’s revenues, profits and cash flow for the year to the end of March – in fact, it expects it to take another two to three years. Transnet to regain its operational performance before the pandemic.
The company is unable to honor some of its contracts with commodity exporters, mainly due to problems in its freight rail division. Transnet does not have enough operational locomotives and has also been hit by cable theft and vandalism, flooding and speed constraints due to inadequate maintenance.
“Moody’s expects a sustained recovery to be dependent on some level of operational and organizational restructuring, such as public-private partnerships or asset sales,” the ratings agency said in a statement.
In the meantime, Transnet will continue to face substantial refinancing risk over the next six to 18 months if the maturity of the $1 billion bond in July is paid with short-term financing.
Failing to address this risk well in advance would warrant a downgrade, with Moody’s seeking to “resolve” its review of Transnet within the next three months.
In a statement, Transnet said it took note of Moody’s report and that “various financing initiatives” will be concluded well before the bond’s upcoming maturity.
He also says he has made progress with plans to issue bonds in local and international markets.
“This will fundamentally mitigate and address liquidity and refinancing needs for the next 18 months.”
He added that his private sector participation plans are “well advanced”. In April, Transnet announced that it would sell 16 slots on its rail network to third parties. Six of these will be for containers and general cargo moving between City Deep and Durban. Ten other slots are available between Springfontein in the Free State and East London.
In addition, Transnet indicates that it is progressing with the purchase of new locomotives, which should be concluded in the coming months and will allow it to transport more freight volumes.
The potential downgrade of Transnet by Moody’s runs counter to more positive assessments of the South African government’s position, with Moody’s and S&P having upgraded the country’s outlook in recent weeks.