Paris, October 10, 2019 -- Moody's Investors Service ("Moody's") has today
affirmed all the ratings of Transnet SOC Ltd. ("Transnet"),
including its Baa3 senior unsecured rating and Aa1.za national
scale rating on its senior unsecured Medium-Term Note Program.
The outlook has changed to negative from stable.
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
The decision to change the rating outlook to negative from stable reflects
Moody's view that Transnet's liquidity has weakened and its
reliance on refinancing activities has increased because of significant
debt maturities due in the next several years, with about ZAR52.5
billion of debt net of hedging (47% of total) maturing between
August 2019 to March 2023. Event risks, such as the recent
qualified audit opinion on the financial statements for fiscal year ended
31 March 2019 (FY 2018/19), make the company's credit profile
vulnerable given the need to maintain strong access to the debt market.
On 30 September 2019, Transnet released its financial accounts for
FY 2018/19 which included a qualified audit opinion. The circumstances
behind the qualified opinion are technical in nature and the auditor's
report confirms that the financial statements meet the requirements under
International Financial Reporting Standards (IFRS) and South Africa's
Companies Act. However, under South Africa's Public
Finance Management Act (PFMA), public sector companies such as Transnet
are required to report the amount of irregular expenditures, defined
as expenditures that did not fully meet procurement regulations.
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 ZAR13.9
billion of borrowings.
These loan agreements constitute about 11% of Transnet's
total debt and the company is in the process of seeking waivers from lenders.
The company's financial accounts for the year ended 31 March 2018
(FY 2017/18) also had a qualified audit opinion which was an event of
default under ZAR15.8 billion of bilateral and syndicated loan
agreements. The lenders provided waivers last year with conditions
requiring Transnet to improve its governance and internal controls,
efforts that the FY 2018/19 audit report has recognized. Moody's
understands that the lenders who provided waivers in the previous year
are the same as the ones Transnet is currently in the process of seeking
waivers from. Moody's base case expectation is that the waivers
will be granted in a timely manner, absent which there is likely
to be downward pressure on the ratings.
Transnet falls under Moody's Government-Related Issuers (GRI)
rating methodology given its 100% government ownership and importance
to the South African economy. The company's Baseline Credit
Assessment (BCA), a measure of standalone credit quality prior to
any assessment of potential extraordinary government support, remains
unchanged at baa3. The strong link between Transnet and the Government
of South Africa (Baa3 stable) is reflected by Moody's GRI assumptions
of 'Very High' default dependence with the Government of South Africa
and 'Strong' extraordinary support from the government. The assumption
for extraordinary support has been changed to 'Strong' from
'High' to reflect a more challenging funding environment and
a sovereign under greater fiscal pressure.
'Surface Transportation and Logistics' is one of the 11 sectors
that Moody's has identified to have elevated environmental risk.
Transnet's rail business is exposed to environmental regulations
because diesel engine emissions from freight trains have an impact on
air quality. South Africa introduced Carbon Tax regulations in
June 2019, but Moody's does not anticipate this to have a
material financial impact on Transnet. Lower demand for bulk freight
commodities that are exposed to environmental trends, particularly
coal, pose a business risk for the company.
From a corporate governance perspective, the company has made efforts
in the past year to strengthen its governance structure but recent events
including the FY 2018/19 auditor's report point to the need for
further improvement. In addition, a number of senior leadership
positions in Transnet's executive committee have yet to be permanently
filled following the dismissal, resignation or suspension of various
executives since last year, a situation which in Moody's view
weakens the decision-making capacity of the organization.
LIQUIDITY
Moody's liquidity analysis assesses a company's ability to
meet its funding requirements under a scenario of not having access to
new funding (including for renewal of existing loans) over the next 12-18
months. Under this approach, Transnet's liquidity is
currently weak given the company's high capex intensity and material
upcoming debt maturities. For FY 2018/19, the company's
cash flow from operations as adjusted by Moody's was ZAR20.3
billion relative to ZAR18.6 billion of adjusted capex, leaving
little free cash flow available to repay debt. Transnet has ZAR8.5
billion of debt net of derivatives maturing in the FY 2019/20 period.
Transnet currently does not have any long-term committed undrawn
facilities to support its liquidity position. However, the
company is in various stages of signing five new long-term bilateral
loans that total ZAR13.5 billion. In addition, the
company continues to have access to ZAR8.3 billion of 365 day short-term
call facilities and ZAR4 billion of overdraft facility. However,
under Moody's approach these are weak sources of liquidity given
their short-term nature.
RATING OUTLOOK
The negative outlook reflects Transnet's increasing exposure to
refinancing risk because of significant debt maturities that are due in
the next several years in combination with a macroeconomic environment
which remains weak.
WHAT COULD CHANGE THE RATINGS UP/DOWN
An upgrade is unlikely at this time because of the negative outlook.
The ratings are also constrained because of (1) the credit linkages that
exist between South Africa's sovereign creditworthiness and Transnet;
and (2) Transnet's high capital spending programme and sizeable funding
needs which results in a sustained high level of leverage and negative
free cash flow.
The ratings are likely to be downgraded in the event of a downgrade of
South Africa's government bond rating, given Moody's assessment
of a strong link between the two. Transnet's BCA is likely to face
downward pressure if the company's liquidity position remains weak
or if the company does not deliver sufficient growth in funds from operations
(FFO) to offset its debt-funded capital spending, such that
its (1) consolidated FFO/debt is sustainably below 10%, or
(2) (FFO + interest expense)/interest expense is below 2.0x
on a sustained basis. These metrics stood at 16.6%
and 2.6x respectively as of FY 2018/19.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Transnet SOC Ltd.
....ST Issuer Rating, Affirmed P-3
....NSR Subordinate Medium-Term Note
Program, Affirmed Aa3.za
....NSR Senior Unsecured Medium-Term
Note Program, Affirmed Aa1.za
....NSR Other Short Term, Affirmed P-1.za
....Subordinate Medium-Term Note Program,
Affirmed (P)Ba1
....Other Short Term, Affirmed (P)P-3
....Senior Unsecured Medium-Term Note
Program, Affirmed (P)Baa3
....Senior Unsecured Bank Credit Facility,
Affirmed Baa3
....Commercial Paper, Affirmed P-3
....BACKED Senior Unsecured Regular Bond/Debenture,
Affirmed Baa3
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa3
Outlook Actions:
..Issuer: Transnet SOC Ltd.
....Outlook, Changed To Negative From
Stable
PRINCIPAL METHODOLOGIES
The methodologies used in these ratings were Surface Transportation and
Logistics published in May 2019, and Government-Related Issuers
published in June 2018. Please see the Rating Methodologies page
on www.moodys.com for a copy of these methodologies.
Moody's National Scale Credit Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale credit ratings in that they are
not globally comparable with the full universe of Moody's rated entities,
but only with NSRs for other rated debt issues and issuers within the
same country. NSRs are designated by a ".nn"
country modifier signifying the relevant country, as in ".za"
for South Africa. For further information on Moody's approach to
national scale credit ratings, please refer to Moody's Credit rating
Methodology published in May 2016 entitled "Mapping National Scale Ratings
from Global Scale Ratings". While NSRs have no inherent absolute
meaning in terms of default risk or expected loss, a historical
probability of default consistent with a given NSR can be inferred from
the GSR to which it maps back at that particular point in time.
For information on the historical default rates associated with different
global scale rating categories over different investment horizons,
please see http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.
COMPANY PROFILE
Transnet is a state-owned limited liability company, that
owns and operates the national rail network and freight railways,
the 8 commercial ports, and the multi-product hydrocarbon
pipeline network of South Africa. All activities except engineering
were profitable for the fiscal year ended 31 March 2019, with (1)
rail activities accounting for 54% of the group's reported EBITDA
(excluding intercompany eliminations and specialist units); (2) ports
accounting for 35%; and (3) the pipeline business accounting
for 11%.
Transnet is wholly owned by the government of South Africa, and
the company's Memorandum of Incorporation restricts Transnet from disposing
of: (1) the whole or substantially the whole of the undertaking
of Transnet; or (2) the whole or the greater part of the assets of
Transnet, without prior approval of the Minister of Public Enterprises.
As long as the government of South Africa is the majority shareholder
of the company, the Directors of Transnet are not entitled to apply
for the winding up of Transnet without the approval of the Minister of
Public Enterprises and the Minister of Finance.
The Local Market analyst for these ratings is Rehan Akbar, +971
(423) 795-65.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Paco Debonnaire
AVP - Analyst
Infrastructure Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
