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Rating Action:

Moody's places Transnet's ratings on review for downgrade

08 Jun 2022

London, June 08, 2022 -- Moody's Investors Service ("Moody's") has today placed most of Transnet SOC Ltd.'s ("Transnet" or "the company") ratings on review for downgrade. This includes the company's Corporate Family Rating (CFR) of Ba3, the national scale senior unsecured MTN programme (Medium-Term Note) rating of A2.za and the national scale other short term rating of P-1.za. The outlook has been changed to ratings under review from negative. Moody's has also lowered Transnet's Baseline Credit Assessment (BCA), a measure of standalone credit quality prior to any assessment of potential extraordinary government support, to b2 from b1.

A full list of affected ratings is provided towards the end of this press release.    

RATINGS RATIONALE

The BCA has been lowered to b2 from b1 and all ratings have been placed on review for downgrade because Moody's has become increasingly concerned over the company's exposure to weak liquidity management and high refinancing risk. Transnet has a $1 billion international bond maturity on 26 July 2022 (which was fully cross-currency hedged at the time of issuance) and currently does not have sufficient committed liquidity sources to repay this maturity. The company has plans to redeem the bond with a new $1 billion international bond issuance before maturity, however Moody's believes a sufficiently large international bond issuance prior to the July maturity is becoming increasingly challenging given current market conditions. Moody's nevertheless believes the risk of default in July remains low as Transnet is in advanced stages of securing binding commitments for credit facilities with a diverse group of lenders, which Moody's believes will be available before the 26 July maturity.  Moody's also continues to believe in strong support from the South African government in case it would be required.

The delay in securing legally binding refinancing commitments well in advance of its international bond maturity has raised Moody's concerns around financial policies and governance, from a financial management perspective, particularly when combined with the exposure the company has had to weak compliance and reporting arising from legacy issues. These weaknesses include the company's repeated delays in publishing audited financial statements, its inability to obtain unqualified audit opinions and recurring breaches of debt covenants. Moody's recognizes that the new management team that joined in 2020, including a new CEO, CFO and the Board have strengthened internal controls and oversight processes and in March 2022 successfully obtained an exemption from specified provisions of South Africa's Public Finance Management Act (PFMA), which Moody's expects will allow the company to release audited financial statements for the financial year that ended March 2022 (FY2022) with an unqualified audit opinion and within 180 days of the financial year end, as prescribed by the South African Companies Act.

Weak financial and liquidity risk management are particularly concerning as Transnet will continue to face substantial refinancing risk over the next 6-18 months if the $1 billion bond maturity in July is redeemed with short term financing. Moody's will therefore review the company's plans and internal policies to address this refinancing risk in a timely manner and a failure to materially mitigate the refinancing risk over the next 6-18 months well in advance would warrant a downgrade.

Transnet's liquidity profile has come under increasing pressure because the maturity of the company's $1 billion international bond on 26 July 2022 is less than 2 months away and the company does not have sufficient liquidity sources to redeem the maturity. As of 31 May 2022, Transnet had around R1.3 billion of cash on balance sheet against debt maturities of R23.5 billion until March 2023. The company had also drawn down R8.7 billion of call loans, which most lenders can cancel at any time upon 365 days' notice, but that Moody's expects will be rolled over as has been the case historically. Out of the R23.5 billion maturities in FY2023 (ending March 2023), R16.2 billion are due until the end of July 2022, primarily in the form of the $1 billion international bond. Moody's believes that the remainder of the existing FY2023 maturities and a Moody's expected free cash flow shortfall of around R6 billion will be funded by a long term credit facility that is in the final stages of documentation.

If the company secures short term bridge financing to redeem the $1 billion bond at maturity in July 2022, this will have to be replaced with long term financing during calendar year 2023 and will be cumulative to refinancing requirements of existing debt maturities of R13.1 billion in FY2024, most of which are due during calendar year 2023. This will raise funding requirements for calendar year 2023 to around R23 billion.

The maturity profile remains concentrated after that, with overall maturities of R70 billion over the next 5 years, until March 2027.

The company is working on a number of initiatives to raise additional funding, including entering public private partnerships for the development of infrastructure as well as some asset sales. Funding obtained in this way could partially alleviate Transnet's substantial financing requirements over the next years, however no details have been disclosed so far and given the company's government ownership, decision making can be protracted.

The operating environment in South Africa has improved thanks to high commodity prices and increased international demand for some of the main commodities that Transnet transports, in the wake of the Russian invasion of Ukraine, including coal and manganese. Nevertheless, Transnet has been unable to benefit from the improved environment and remains unable to fulfill some of its contractual requirements with commodity exporters, mainly due to capacity constraints in its Freight Rail division. Constraints are caused by a combination of availability of fewer operational locomotives, cable theft and vandalism, environmental disruptions, and speed constraints due to inadequate maintenance. Moody's therefore expects no material recovery for the financial year that ended in March 2022 with regards to revenue and Moody's adjusted EBITDA and cash flow. Moody's expects it will take at least 2-3 years for the company to recover to its pre-pandemic operating performance, while investment requirements remain high with limited ability for reductions or deferrals and a higher interest rate environment and higher risk credit profile will increase Transnet's cost of debt. Moody's expects a sustainable recovery will depend on some level of operational and organizational restructuring, such as public-private partnerships or asset sales.

Transnet's Ba3 CFR continues to reflect 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.

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 (Ba2 stable) 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 two notch uplift from the BCA.

Transnet's Ba3 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; and (3) operation of strategically important hydrocarbon pipelines. At the same time, the ratings also reflect (1) liquidity pressure over the short term and large debt maturities over the next five years which requires strong access to debt markets to refinance; (2) weak free cash flow generation due to high capital spending requirements; (3) aging infrastructure causing operational disruption and reducing capacity; and (4) regulatory uncertainty on tariff structures.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS          

The review for downgrade reflects Moody's view of heightened exposure to weak governance, especially with regards to financial and liquidity risk management. The review will focus on reviewing Transnet's financial policies and plans to refinance calendar year 2023 maturities of around R23 billion in a timely manner. Moody's will look to resolve the review within three months.

Given the review for downgrade, an upgrade is unlikely at this time. Moody's would consider a negative outlook at the current rating level if Transnet secures long term financing to redeem the July 2022 bond maturity or any short term funding used to bridge the redemption of this bond. Moody's would further consider stabilizing the outlook if the company's liquidity profile is sustainably restored and if corporate governance, including financial policies and liquidity management is strengthened. To consider an upgrade, we would also expect to see operational improvements and EBIT/ interest expense to exceed 1.0x on a sustained basis. An upgrade of the CFR would require raising the BCA by at least two notches while the sovereign bond rating of South Africa remains Ba2 or improves.

Transnet's BCA is likely to face downward pressure if Transnet's liquidity risk management plan for calendar year 2023 does not provide sufficient confidence of timely and successful refinancing. A downgrade of the BCA is likely to lead to a downgrade of Transnet's ratings. 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.

LIST OF AFFECTED RATINGS

Issuer: Transnet SOC Ltd.

Downgrades:

.... Baseline Credit Assessment, Downgraded to b2 from b1; Placed on Review for further Possible Downgrade

On Review for Possible Downgrade:

....LT Corporate Family Rating, Placed on Review for Possible Downgrade, currently Ba3

....Probability of Default Rating, Placed on Review for Possible Downgrade, currently Ba3-PD

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently Ba3

....BACKED Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently Ba3

....Senior Unsecured Medium-Term Note Program, Placed on Review for Possible Downgrade, currently (P)Ba3

....NSR Senior Unsecured Medium-Term Note Program, Placed on Review for Possible Downgrade, currently A2.za

....Subordinate Medium-Term Note Program, Placed on Review for Possible Downgrade, currently (P)B1

....NSR Subordinate Medium-Term Note Program, Placed on Review for Possible Downgrade, currently Baa2.za

....NSR Other Short Term, Placed on Review for Possible Downgrade, currently P-1.za

Outlook Actions:

....Outlook, Changed To Ratings Under Review From Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Surface Transportation and Logistics published in December 2021 and available at https://ratings.moodys.com/api/rmc-documents/360641. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

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_1280297.

The local market analyst for this rating is Lisa Jaeger, +971 (423) 796-59.

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Raffaella Altamura
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

David G. Staples
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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