Paris, July 23, 2020 -- Moody's Investors Service, (Moody's) has today confirmed
the Ba1 Long Term corporate family rating (CFR) and the Aa2.za
national scale senior unsecured MTN (Medium-Term Note) rating of
Transnet SOC Ltd. (Transnet). Transnet's baseline
credit assessment (BCA), a measure of standalone credit quality
prior to any assessment of potential extraordinary government support,
has been lowered to ba2 from ba1. The outlook has been changed
to negative from ratings under review.
This rating action concludes the review for downgrade Moody's had initiated
on 4 April 2020. A full list of affected ratings and entities can
be found at the end of this press release.
RATINGS RATIONALE
The decision to confirm Transnet's Ba1 CFR reflects the company's
solid business profile with ownership of long-term infrastructure
assets and a monopoly position in South Africa that provides a degree
of cash flow visibility. The company has weathered the impact of
the coronavirus pandemic relatively well and a material portion of lost
revenues during the April to June period have been offset by a reduction
in operational costs and capital expenditure. Moody's forecasts
Transnet's funds from operations (FFO)/debt to be 17% for
the fiscal year ending March 2020 (FY2019/20). This is forecasted
to temporarily fall to 12% in FY2020/21 because of the coronavirus
impact followed by a return to 15% by FY2021/22.
The lowering of Transnet's BCA to ba2 from ba1 reflects Moody's
view that Transnet's concentrated debt maturity profile heightens
refinancing risk. The operating environment in South Africa remains
challenging given the coronavirus related uncertainty. About half
of Transnet's ZAR123 billion of debt (net of FX-hedges) is
due over the next four years. This amount is significant relative
to Transnet's free cash flow generation and requires Transnet to
significantly rely upon refinancing activities through the debt market.
As at 31 March 2020, Transnet had ZAR15 billion of debt maturing
over the next 12 months and ZAR60 billion maturing until March 2024.
The most imminent sizeable debt maturity consists of a ZAR7 billion domestic
bond maturing in September 2020 followed by a $1 billion (ZAR12.6
billion net of hedge instruments) international bond due in July 2022.
The company continues to maintain access to ZAR13 billion of short-term
call and overdraft facilities from domestic banks, but in Moody's
view these are not strong sources of liquidity because of their short-term
nature. The company is therefore reliant on continued access to
the bond and loan markets for regular roll overs and new issuances.
This makes Transnet's liquidity vulnerable to event risks that could
cause challenges in accessing new financing.
The company has historically had a good track record in refinancing upcoming
maturities through diversified sources of funding and benefits from South
Africa's deep financial market. Transnet raised a new ZAR5
billion loan in April, it currently has access to ZAR4 billion of
undrawn long-term facilities and is in the process of finalizing
a new ZAR3.5 billion facility. These initiatives however
do not fully cover the refinancing needs of the company over the next
12-18 months, which is the time horizon Moody's uses
for its liquidity assessment.
About ZAR24 billion of bank loans are subject to a 2.5x interest
coverage maintenance covenant. This financial covenant could be
in breach for the September 2020 test date, but Moody's anticipates
that lenders will provide waivers if required given the unprecedented
lockdown conditions caused by the coronavirus pandemic.
Transnet falls under Moody's Government-Related Issuers Methodology
given its 100% government ownership and importance to the South
African economy. The strong link between Transnet and the Government
of South Africa (Ba1 negative) is reflected by Moody's assumptions
of 'Very High' default dependence with the Government of South Africa
and 'Strong' extraordinary support from the government, which supports
a one-notch uplift from the BCA.
Transnet's Ba1 CFR is supported by its (1) monopoly on the South
African railway infrastructure and freight services; (2) ownership
of South Africa's eight seaports and operation of a large part of South
Africa's stevedoring services; (3) operation of strategically important
hydrocarbon pipelines; and (4) good profitability, as reflected
by its stable adjusted EBITDA margin of around 45% on average.
At the same time, the ratings also reflect (1) Transnet's weak free
cash flow generation given its ongoing capital spending programme;
(2) its high financial debt levels; (3) significant debt maturities
over the next several years which requires strong access to debt markets
in order to refinance; and (4) regulatory uncertainty on tariff structures.
OUTLOOK
The negative outlook is aligned with the negative outlook on the sovereign
rating and also reflects downside risk from the economic uncertainty created
by the pandemic, as well as the ensuing recessionary environment,
which may have a worse effect on Transnet's revenues and profitability
than currently anticipated by Moody's.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely at this time because of the negative outlook.
Transnet's Ba1 CFR is constrained because of the credit linkages
that exist between South Africa's sovereign creditworthiness and Transnet.
An improvement in Transnet's liquidity profile would support a ba1
BCA.
Transnet's BCA is likely to face downward pressure if the company's
liquidity position further weakens or if the company displays a track
record of negative free cash flow. Consolidated FFO/debt trending
below 15% or EBIT/interest expense below 1.5x on a sustained
basis would also pressure the rating. These metrics stood at 17.6%
and 1.6x respectively for the last twelve months ended 30 September
2019. A downgrade of South Africa's government bond rating (Ba1
negative) will lead to a downgrade of Transnet's rating given our
assessment of strong credit linkages between the two.
Confirmations:
..Issuer: Transnet SOC Ltd.
....LT Corporate Family Rating, Confirmed
Ba1 previously placed on review for downgrade
....Probability of Default Rating, Confirmed
Ba1-PD previously placed on review for downgrade
....NSR Other Short Term, Confirmed
P1.za previously placed on review for downgrade
....NSR Subordinate MTN, Confirmed A1.za
previously placed on review for downgrade
....NSR Senior Unsecured MTN, Confirmed
Aa2.za previously placed on review for downgrade
....Subordinate MTN, Confirmed (P)Ba2
previously placed on review for downgrade
....Senior Unsecured MTN, Confirmed
(P)Ba1 previously placed on review for downgrade
....Senior Unsecured Regular Bond/Debenture,
Confirmed Ba1 previously placed on review for downgrade
....BACKED Senior Unsecured Regular Bond/Debenture,
Confirmed Ba1 previously placed on review for downgrade
Outlook Actions:
..Issuer: Transnet SOC Ltd.
....Outlook, Changed To Negative From
Rating Under Review
PRINCIPAL METHODOLOGY
The methodologies used in these ratings were Surface Transportation and
Logistics published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113382,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
Alternatively, 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309.
The local market analyst for this rating is Rehan Akbar, +971
(423) 795-65.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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
Asst Vice President - Analyst
Financial Institutions 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
