The credit ratings agency Moody's has placed most of Transnet’s credit ratings on review for a downgrade.
Moody’s says it has become increasingly concerned over the Transnet's exposure to weak liquidity management and high refinancing risk.
Transnet has a $1-billion international bond that matures next month, but currently does not have sufficient funds to repay bondholders. Transnet only had around R1.3-billion of cash on its balance sheet, and will need to pay bondholders R23.5-billion as more bonds mature until March 2023.
The company planned to redeem the bond that matures next month with a new $1-billion international bond issuance in coming weeks.
"However, Moody's believes a sufficiently large international bond issuance prior to the July maturity is becoming increasingly challenging given current market conditions," the agency said in a statement.
Nevertheless, it believes a 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 believes that the government will offer "strong" support, if required.
Still, Moody’s say the delay in securing the refinancing commitments has raised concerns around Transnet’s financial policies and governance, which added to its unease about weak compliance and reporting.
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.
In addition, Moody’s doesn’t expect a material recovery in Transnet’s revenue, profit and cash flow for the year to end-March – in fact, it believes Transnet will take another two to three years recover to its pre-pandemic operating performance.
The company is unable to honour some of its contracts with commodity exporters, mainly due to problems in its freight rail division. Transnet doesn’t have enough operational locomotives and has also been hit by cable theft and vandalism, flooding, and speed constraints due to inadequate maintenance.
"Moody's expects a sustainable recovery will depend on some level of operational and organisational restructuring, such as public-private partnerships or asset sales," the ratings agency said in a statement.
In the meantime, Transnet will continue to face substantial refinancing risk over the next six to 18 months if the $1-billion bond maturity in July is paid with short-term financing.
Failure to address this risk well in advance would warrant a downgrade, with Moody’s looking to "resolve" its review of Transnet in the next three months.
In a statement, Transnet says it has taken note of Moody’s report, and that “various funding initiatives” will be concluded well in advance of the upcoming bond maturity.
It also says it has progressed with plans to issue bonds in both local and international markets.
"This will mitigate and fundamentally address the liquidity and refinancing requirements for the next 18 months."
It added that its plans for private-sector participation are "well-advanced". In April, Transnet announced that it will sell 16 slots on its rail network to third parties. Six of these will be for containers and general goods moving between City Deep and Durban. Ten other slots are available between Springfontein in the Free State and East London.
In addition, Transnet says it is progressing with buying new locomotives, which should be concluded in coming months and will enable it to move more freight volumes.
Moody’s potential downgrade of Transnet flies against more positive assessments of the South African government’s position, with both Moody’s and S&P upgrading the country’s outlook in recent weeks.