Moody’s Investors Service affirmed all the ratings assigned to Transnet SOC Ltd. (“Transnet”) and changed the outlook from stable to negative on Thursday.
“Today’s actions follow the weakening outlook of South Africa’s credit profile, as reflected by Moody’s change of South Africa’s government bond rating outlook to negative from stable on December 15,” said Xavier Lopez Del Rincon, vice president and senior analyst at Moody’s Investors Services.
“The negative outlook is driven primarily by the strong credit linkages that exist between the Government of South Africa and Transnet whereby Transnet’s operations have a high correlation to the political, social and economic environment in South Africa.”
Moody’s said it could consider downgrading Transnet’s ratings in the event of a downgrade of the governments bond rating, given the rating agency’s assessment of the strong linkage between the two.
Moody’s could also lower Transnet’s Baseline Credit Assessment if it failed to deliver sufficient growth in funds from operations to offset its debt-funded capital expenditures.
“Against the backdrop of Transnet’s significant capital expenditure programme, we will continue to closely monitor the impact of current economic conditions on the company, particularly if volumes decelerate or decline,” Del Rincon noted.
“In our view, the key credit factors that will impact Transnet’s standalone credit profile over the next few years are the execution of its capital expenditure programme in the context of maintaining conservative financial discipline and a potential increase in debt that will be needed to meet the large capital expenditure plans outside of its Market Demand Strategy.”
A third factor was the tariffs that Transnet will be able to charge to recover the cost of such increased capital spending.
Moody’s expected Transnet would only commit to capital expenditure that will earn the company a sufficient return on assets to support its funding requirements.