Transnet still in financial trouble despite Moody’s new rating

Moody’s Investors Service’s new Transnet rating from negative to stable is not really good news, considering that the SOE is still in significant financial trouble and the better rating won’t mean much for economic growth.

The outlook on all ratings of Transnet SOC Ltd was changed and Moody’s affirmed most of Transnet’s ratings, including the corporate family rating (CFR) of Ba3, the national scale senior unsecured Medium-Term Note programme rating of A2.za and the national scale other short-term rating of P-1.za.

The Baseline Credit Assessment, a measure of standalone credit quality prior to any assessment of potential extraordinary government support has also been affirmed at b2. No action was taken on the Non-Prime (NP) short term rating.

Transnet’s ratings changed to stable

According to Moody’s, the outlook on Transnet‘s ratings was changed to stable because the company’s liquidity improved after it announced that it successfully priced a new five-year $1-billion international bond that was issued on 6 February. Moody’s now considers Transnet’s liquidity as marginally adequate to cover upcoming debt maturities over the next 12 to 18 months, as well as planned capital expenditure.

Moody’s views liquidity management as a governance factor and has therefore revised the financial policy ESG score to 4 from 5 to reflect highly negative, rather than very highly negative exposure to financial management.

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Transnet’s compliance and reporting score

In addition, Moody’s also revised the compliance and reporting score to 4 from 5 to reflect that the company was able to obtain an unqualified audit opinion for the financial year ending March 2022, which reduces its exposure to compliance and reporting risks to highly negative from very highly negative.

However, Moody’s also noted that Transnet’s operational recovery remains slow. The stable outlook reflects Moody’s expectation that Transnet will continue to strengthen its liquidity profile, while operations will gradually recover to pre-Covid levels over the next two to three years.

The ratings agency will consider an upgrade if Transnet’s operations improve materially, but Moody’s says Transnet’s rating is likely to face downward pressure if the company’s liquidity weakens.

“In the absence of a meaningful improvement in Transnet’s fundamental credit profile, a downgrade of South Africa’s government bond rating would also likely lead to a downgrade of Transnet’s ratings given our assessment of strong credit linkages between the two,” Moody’s said in a statement.

What does it mean for Transnet?

Mesela Nhlapo, chief executive officer at the African Rail Industry Association (ARIA), says it simply means that Transnet gained credit from Moody’s for its successful bond raise in January.

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How much trouble is Transnet in?

Nhlapo says the entity’s financial troubles are significant.

“Transnet itself confirmed in a request to Treasury that it needs R111 billion, of which R80 billion remains unfunded, to ‘restore operations’.”

He says ARIA’s analysis shows that the underspending of maintenance in track infrastructure alone in the last decade is R27 billion.

“The implications of this are that volumes collapsed from 226 million tonnes moved in 2018 to ARIA’s expectation of approximately 160 million tonnes in its March 2023 financial year end, some 29% (170 million tonnes were achieved in 2022).”

At the same time, Transnet’s cashflows are so constrained that it breached its cash interest cover debt covenants at the September half-year results and needed lender waivers.

Nhlapo says what is interesting is that Moody’s talks about Transnet needing to refinance R90 billion of debt in the next five years, but what the ratings agency neglected to say or consider is that Transnet needs to refinance the debt and raise a further R80 billion to improve the condition of the track network, which means the funding requirement is R170 billion in total.

“If Transnet do not spend the R80 billion, freight volumes will continue to reduce, operating cashflows will drop further, even less maintenance will be done, the condition of the track infrastructure will get even worse and the downward spiral will perpetuate itself,” he warns.

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How will this affect the wider economy?

Nhlapo says over the past year, mining production slumped by 9% year-on-year and the mining industry lost an estimated R50 billion in exports in 2022, all due to logistical and energy constraints.

“In addition, mining could have brought in more than R150 billion extra if Transnet operated at nameplate capacity. This means the country is losing on gross domestic product (GDP) and this has a significant bearing on unemployment as well.”