S&P Global Ratings has placed state-owned logistics giant Transnet on credit watch citing concerns over the company’s financial stability and operational performance.
The credit watch placement reflects S&P’s concern that Transnet’s turnaround may not yield timely improvements in cash flow and leverage, potentially triggering a downgrade.
This comes amidst ongoing efforts by Transnet to implement a recovery plan aimed at addressing its mounting challenges.
The global ratings agency maintained its 'BB-' issuer credit rating on Transnet’s senior unsecured debt and affirmed its 'BB' rating on the R3.5 billion government-guaranteed debt. However, S&P’s action underscores the pressing need for Transnet to tackle high leverage levels and restructuring of its capital framework.
Transnet’s Group CEO, Michelle Phillips, on Monday acknowledged the challenges, but expressed confidence in the recovery plan approved by the board in October 2023.
S&P’s ratings, released on Friday, said while Transnet’s operational recovery is expected to gradually improve, its cash flow is unlikely to rise sufficiently or quickly enough to sustain its current liquidity and leverage levels.
The agency said Transnet’s elevated debt is projected to climb from R134.7bn in fiscal 2024 to R151bn by fiscal 2025. This surge in debt, coupled with annual interest expenses of up to R17bn and significant capital expenditure requirements, places further strain on the company’s finances.
Phillips said, “S&P’s decision comes as Transnet is actively implementing a series of focused interventions to enhance both its operational and financial performance.”
Key steps included improving the availability and reliability of rolling stock and rail network infrastructure and implementing operational excellence initiatives to improve productivity, reduce downtime and enhance service delivery.
Philipps said the rating’s action reinforces the significance and urgency of Transnet's ongoing initiatives to address operational and financial challenges and position the organisation as an enabler of economic growth
Phillips added that Transnet would keep S&P updated on progress in tackling operational inefficiencies, financial stability and investment planning.
S&P also noted the importance of government support in Transnet’s recovery journey. The South African government has already provided the parastatal with financial assistance, including a R5.8bn advance for flood repairs and infrastructure investment and a R47bn guarantee framework for fiscal 2024.
However, S&P warned that substantial additional support would likely be necessary to address Transnet’s liquidity and capital structure challenges effectively.
It said while Transnet continues to play a pivotal role in South Africa’s logistics sector, including its dominant position in rail freight and monopoly in regulated port and pipeline activities, its financial risks remain high.
Operational and Financial Hurdles
Transnet’s recovery plan hinges on a gradual improvement in rail and port volumes, with a target of handling 170 million metric tons of freight in fiscal 2025, up from 151.7 million metric tons in fiscal 2024. Enhanced locomotive availability is expected to drive this recovery. However, S&P flagged ongoing risks, including vandalism and infrastructure damage, as impediments to sustained growth.
S&P projects that Transnet’s revenue could rise to between R82bn to R88bn by fiscal 2026, buoyed by its turnaround efforts. Nevertheless, its high fixed-cost base and elevated debt burden are expected to keep adjusted debt-to-Ebita (earnings before interest, taxes, and amortization) ratios above 5x, with free cash flow likely to remain negative in the near term.
In addition to financial pressures, S&P also said there were broader social and governance issues impacting Transnet. Infrastructure damage from criminal activity and social unrest, combined with historical governance failures, continue to undermine operational efficiency.
While Transnet has made strides in improving governance, the agency noted that more time and focus are needed to restore stakeholder confidence.
BUSINESS REPORT