Transnet risks defaulting on a multi-billion rand near-term debt maturity

TRANSNET, the state-owned logistics company, yesterday vowed to work with the government to guide its future audits as the group risks defaulting on multi-billion rand near-term debt maturities due to its struggle to raise new long-term debt to bolster its diminishing liquidity profile.

This comes as Moody’s Investor Services has downgraded Transnet’s ratings status due to its weak liquidity profile and weak corporate governance.

Moody’s on Wednesday downgraded the corporate family rating of Transnet to Ba3 from Ba2 and the national scale senior unsecured Medium-Term Note rating to A2.za from Aa2.za.

Transnet’s baseline credit assessment, a measure of standalone credit quality prior to any assessment of potential extraordinary government support, was lowered to b1 from ba3 with a negative outlook.

Moody's senior analyst Lisa Jaeger said Transnet’s liquidity profile had continued to weaken since June’s rating, and that certain aspects of its corporate governance had not been sufficiently addressed.

“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,” she said.

Jaeger said Moody’s believed these governance failings heightened uncertainty around Transnet’s ability to access international capital markets in a timely manner ahead of a $1 billion (R15bn) international bond maturity in July 2022.

“The outlook remains negative, because liquidity pressure will continue to intensify unless Transnet raises a substantial amount of new long-term financing in the coming months,” Jaeger said.

The state-owned freight and rail logistics entity last week reported a net loss of R8.4bn for the financial year ending March 31, 2021, down from a profit of R2.9bn the previous year.

This was due to the Covid-19 impact on Transnet operations and other expenses that were abnormal to its business operations such as cyberattacks.

But what pushed Transnet deeper into Moody’s downgrade was its qualified audit by the auditor-general, and findings of irregular expenditure of R104bn.

Transnet has been squabbling with the auditor-general over differences in opinion on the accounting treatment of the multi-billion rand 1 064 locomotives, which delayed the release of its financial results.

Transnet’s audit qualification has already resulted in a breach of loan covenants with an outstanding balance of R19.1bn as of September 30, 2021.

Moody’s estimated that for the 12 months ending September 2022, Transnet would have total debt maturities of R22bn, including the $1bn bond maturity in July 2022.

This is in addition to outstanding amounts under its R13.3bn short-term liquidity facilities, of which Moody’s estimates several billion rand were drawn at the end of September 2021.

Moody’s said it believed the company would be able to secure financing commitments that would allow it to meet all obligations due until September 2022, but the risk of default was increasing as sizeable maturities draw closer without refinancing secured.

Transnet, however, said it continued to actively work on a funding plan.