By Maano Andy Thovhakale
Transnet SOC previously stated that it intends to leverage private sector capital and resource capabilities to revitalise its port and rail logistics solutions in the key commodity sectors within which it operates.
Transnet is made up of the following operating divisions:
- Transnet freight rail
- Transnet rail engineering
- Transnet national ports authority
- Transnet port terminals
- Transnet pipelines
- Transnet property.
13 July 2022, Transnet re-entered the international syndicated loan market by signing a five-year Senior Unsecured term loan facility worth $1.5bn (R25.4bn) with a syndicate of international lenders led by Deutsche Bank. Africa Finance Corporation, African Export-Import Bank and Ahli United Bank were involved in the syndicated loan transaction.
The first drawdown amounting to $685m is scheduled for July 2022. The facility is also structured to be repaid in 8 equal semi-annual instalments after a 12-month grace period.
Transnet SOC Ltd is a freight logistics company and operator of rail, port and pipeline infrastructure with the South African government as its sole shareholder.
The South African Government has guaranteed certain borrowings of the Group amounting to R3,5 billion, representing 2,7% of total borrowings of R127,8 billion. No Government guarantees have been issued since 1999.
The $1.5bn (R25.4bn) loan facility will be used by Transnet as follows;
- to finance its capital expansion programme, and
- refinance existing debt in line with Transnet’s 2022/23 funding plan.
Transnet’s capital expansion programme
A proposed R1 trillion has been earmarked by the South African government for infrastructure investment, particularly for network infrastructure, as a central pillar of the plan; and Government is planning for the reform of network industries, including port and rail, to facilitate greater private investment in infrastructure.
Transnet plans to spend R99,8 billion on capital investment over the next 5 years of which 85% (R84,8 billion) will be spent on maintenance and sustaining capital. The high level of investment in sustaining capital investment is due to a significant backlog in infrastructure and rolling stock, coupled with planned mid-life and cyclical maintenance on fleet and port equipment.
R40,7 billion of the R99,8 billion will be spent on maintaining and sustaining permanent ways and rolling stock (locomotives and wagons), while the remainder is planned for port fleet and pipeline equipment. On the expansion side R5,7 billion of the R15 billion is earmarked for expansion of the freight business.
Going forward, Transnet will limit future capital expenditure to 80% of available cash before capital investment and align to the expected cost compression through improved procurement processes, which will ensure a reduction in future debt levels and an improved cash interest cover.
For FY21, cash generated from operations after working capital changes increased by 43,8% to R18,5 billion. Rolling cash interest cover (including working capital changes) at 2.6x, an improvement from FY20, due mainly to the inflow from working capital changes driven by debtors discounting of R4 billion.
In FY21, Transnet’s property plant and equipment (PPE) increased by 1,1% to R296,5 billion mainly as a result of capex and asset revaluations.
For the 6 months period ended 30 Sep 2021, capital investment of R5,7 billion comprised of;
- Expansion of R0,9 billion, and
- Sustaining/maintaining capacity of R4,8 billion.
Infrastructure investment highlights for the 6 months ended 30 Sep 2021 include:
- R1,1 billion invested in rail infrastructure,
- R2 billion invested to maintain the condition of rolling stock,
- R113 million invested in wagon fleet renewal and modernisations,
- R264 million invested in the acquisition of new locomotives,
- R162 million for the construction of the new tippler in Saldanha and related bulk electric power supply,
- R56 million invested in the roads, port entrance and other services for the tank farm in the Port of Ngqura,
- R206 million invested in the acquisition of 45 straddle carriers, and
- R77 million investment in the NMPP programme.
Refinance existing debt in line with Transnet’s 2022/23 funding plan
Based of Transnet’s detailed cash flow forecasts, the forecast funding requirement for the five-year period is R43,3 billion. The funding plan seeks to establish Transnet as a reliable and credible borrower, which, albeit a SOC, secures debt on the strength of its financial position without any government guarantees.
It is worth remembering that the government has guaranteed certain borrowings of the Group amounting to R3,5 billion, representing 2,7% of total borrowings of R127,8 billion. No Government guarantees have been issued since 1999.
Here’s a list of Transnet’s funding sources;
- International and domestic capital markets,
- Loan market (public and private) • Development finance institutions (domestic and international),
- Export credit market,
- Structured financing,
- Partial funding by customers and interested parties forming part of Transnet’s Capital Investment Plan, and
- Project-specific funding.
Transnet says for the 6 months ended 30 Sep 2021, its well-defined funding strategy enabled it to raise R5,2 billion long-term funding from bond issuances under the domestic medium term note programme, and through development finance institutions (DFIs), granted on the strength of its financial position.
For the 6 months ended 30 Sep 2021, the gearing ratio decreased to 46,6% vs 48,7% as at 31 Mar 2021. This level is within the Group’s target range of <50%, and is well within the triggers in loan covenants, reflecting the available capacity to continue with its investment strategy, aligned to validated market demand. The gearing ratio is expected to remain within the target ratio over the medium term.
Derivative financial instruments are held by the Group to hedge financial risks associated with its capital investment and borrowing programmes.
Transnet’s liquidity issues.
08 Jun 2022, Moody’s lowered Transnet’s baseline credit assessment, a measure of standalone credit quality prior to any assessment of potential extraordinary government support, to b2 from b1.
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 on 26 July 2022 is redeemed with short term financing.
Transnet’s liquidity profile has come under increasing pressure because it does not have sufficient liquidity sources to redeem the maturity of the company’s $1 billion international bond on 26 July 2022.
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.
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.
If the company secures short term bridge financing to redeem the $1 billion bond at maturity on 26 July 2022, this will have to be replaced with long term financing during 2023 and will be cumulative to refinancing requirements of existing debt maturities of R13.1 billion in FY24, most of which are due during 2023. This will raise funding requirements for 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.
Transnet went on an Investor Deal Roadshow from 12 January 2022 to 14 January 2022 with various investors.
Transent had the following Funding Initiatives in mind when it went on the roadshow;
- Targeting the domestic debt capital markets to create liquidity headroom of between R5bn-R7bn over next 12-18 months,
- Refinance the $1bn TNUS22 bond maturity in the global debt capital markets with bridge financing being considered as a stand-by liquidity facility,
- Syndicated term loan of US$1bn, and
- Bilateral loans of R4bn-R5bn.
Below was the indicative term-sheet that Transnet took to the Investor Deal Roadshow;
09 February 2022, Transnet gave an update of the Investor Deal Roadshow. Transnet successfully raised R2.015 billion on senior unsecured notes ranging from a tenor of 1 to 12 years. The auction was well received, attracting a diverse investor base and achieving an order book of R2.570 billion (1.28x subscribed).
Transnet was able to leverage private sector capital.
What can we pick up from Transnet’s consolidated financial results for the six months ended 30 September 2021;
- Revenue increased by 10,5% to R35,4 billion in line with increased petroleum and container volumes due mainly to improved economic conditions.
- Net operating expenses decreased by 0,4% to R22,1 billion, due mainly to the impact of the third-party settlement received partially offset by fixed cost increases.
- EBITDA of R13,3 billion, with the EBITDA margin increasing to 37,5%.
- Cash generated from operations after working capital changes increased by 43,8% to R18,5 billion.
- Capital investment spend increased by 15,5% to R5,7 billion. B-BBEE spend amounted to R11,31 billion,
- 1,9% of labour costs were spent on training, focusing on artisans, engineers, and engineering technicians. In October 2021, voluntary severance package process was concluded, with 2 800 employee applications being approved. The related cost of this process was R1,8 billion. This process will aid in the containment of personnel costs regarding related redundancies and will therefore result in future personnel cost savings,
- Gearing of 46,6% and rolling cash interest cover at 2,6x.
- Profit from operations after depreciation and amortisation more than doubled to R5,9 billion from R2,8 billion, which was a marked improvement from the September 2020 results,
- Net finance costs decreased by 9,3% to R5,1 billion resulting from the decision to utilise cost-effective short-term facilities, while longer-term funding is being negotiated,
- Cash generated from operations after working capital changes increased by 43,8% to R18,5 billion. Rolling cash interest cover (including working capital changes) at 2,6x, an improvement from the prior period, due mainly to the inflow from working capital changes driven by debtors discounting of R4 billion.
Overall, the year’s exports increased by 7,5% in nominal terms, underpinned largely by a 24% (or R112,5 billion) rise in mining exports, particularly gold, platinum and iron ore
Issues such as; taking cable theft, locomotive shortages have affected Transnet’s operations and caused serious headaches for coal suppliers.
18 Oct 2021, Thungela Resources said that the state of Transnet’s rail network will force it to scale down production targets and has cut 2021 export saleable production guidance to between 14.8m tonnes and 15.2m tonnes.
Tharisa, which is SA’s 4th-largest chrome exporter started to rely heavily on road transport to move bulk commodity because of constraints caused by the Transnet Freight Rail. Tharisa normally sends 70% of its 1.5m tonnes of annual chrome exports by rail.
Let’s hope Transnet’s plans to spend R99,8 billion on capital investment over the next 5 years of which 85% (R84,8 billion) will be spent on maintenance and sustaining capital will go a long way in restoring Transnet to its former glory.
Maano Andy Thovhakale publishes a LinkedIn newsletter, “Deal Zone”, subscribe by clicking here.