The significance of Transnet’s new R25.5bn international loan

Lindani Vezi of Futuregrowth notes an imminent debt maturity of R1bn that Transnet must refinance to potentially remove the risk of a Moody’s downgrade.

FIFI PETERS: Transnet had a good statement to issue earlier, I think, some good news for the state-owned enterprise. They have managed to get a credit lifeline from international investors, and the money that they are able to access will essentially help them pay for debt, as well as fund the all-important infrastructure projects that we need to get this economy really growing again and enable more jobs to be created.

Read: Transnet secures R25.5bn credit facility, with Deutsche Bank as lead bookrunner

But for more on Transnet and this $1.5 billion facility – which translates to around R25.5 billion – that they were able to get from international markets I’m joined by Lindani Vezi, the investment analyst for listed credit at Futuregrowth.

Lindani, is this a positive for Transnet? I see that they even have a year’s grace before they have to start making repayments on the money that they eventually use. Do you think that this is a good story, and a reflection that Transnet is in good credit standing, at least?

LINDANI VEZI: Good evening Fifi, and good evening to your listeners. Most definitely. This is definitely a credit positive. I think Transnet’s ability to raise R1.5 billion in the current market indicates that there is still credit [available] for some of our SOEs. And also the 12-month capital grace period will allow Transnet to build up cash resources in order to start servicing this facility over the [four-year] period.

FIFI PETERS: Do you know anything more about the loan, things like the interest rate at which the loan was granted?

LINDANI VEZI: This was a bilateral agreement. Therefore the market is not aware of the pricing of this loan agreement.

FIFI PETERS: We are in a time where interest rates are rising, and I’m just wondering if they would be much lower in the international markets, given that their interest rates are a lot lower than [ours]. But [I also wonder] whether this presents any repayment risk for Transnet, given the uncertain times that we’re all living in right now.

LINDANI VEZI: I think the main reason why Transnet started to tap into the international debt capital market was to address or raise US dollar funding, because at the end of July, at the end of this month, they have a $1 billion international bond that is maturing; so this funding is primarily raised to match the upcoming maturity. And in terms of interest rates, they’ll probably receive much better interest rates in the international capital market in relation to what they would have attracted in the local capital market.

FIFI PETERS: All right. So it sounds like … you are positive and this is a good development for Transnet, nothing for us to be worried about as taxpayers here in South Africa?

LINDANI VEZI: Definitely nothing to worry about at the moment. I think it’ll also address some of the critical issues that we’ve seen recently, such as capacity constraints on the freight rail division and Transnet has actually indicated that they will be issuing tenders to buy more locomotives in order to fix or replace the missing-capacity constraints.

FIFI PETERS: So the reason for going out this time – this is the first time in a very long time that they have gone out to the international market (almost a decade) – was to get some support to, number one, help refinance the debt, as you’ve said, and also to build some projects. Do you know, or can you suggest which should have the higher priority right now? Should it be addressing some of the historic debt or should it be investing for the future and putting more money in infrastructure spending, in your view?

LINDANI VEZI: In my view this is actually a combination of the two going forward. What happened at present is that there was an imminent debt maturity of R1 billion that had to be refinanced. I think both local and international investors in the bond market were a bit cautious with trading or investing in Transnet, mainly due to this massive maturity. And even Moody’s recently issued a notice indicating that they would consider downgrading Transnet’s credit rating on the back of the imminent maturity. So now that the maturity has been addressed, I think Transnet is in a much better position to address its extension plans.

FIFI PETERS: So you’re saying that they’ve potentially removed the risk of a Moody’s downgrade now after this facility?

LINDANI VEZI: Most definitely.

They’ll probably avoid a further downgrade now that the refinance has been addressed.

FIFI PETERS: Can you tell us how the bonds locally reacted to this, and whether you think that this could eventually encourage a lot more local participation from investors in Transnet?

LINDANI VEZI: At present we haven’t seen much movement in the Transnet space. However, the general market movement has been that there’s been compression in the market. So I actually anticipate that there would be a further compression space, compression on Transnet also, over the coming weeks.

FIFI PETERS: But do you think that this money is enough to address all the things that they need to, or do you think that we could see Transnet going back to the international market very soon if this current funding doesn’t entirely plug the gap that they need?

LINDANI VEZI: I think most probably they will be coming back to the market to raise more funding. Transnet is actually one of those SOEs (state-owned enterprises) that is [rather] big for our local capital market. So they need to access both local and international capital markets in order to be able to adequately fund the business.

FIFI PETERS: And would that be a problem if they went out again and got foreign money with the rand so volatile right now, and interest rates and all of that going up?

LINDANI VEZI: No, not at all. I think there are adequate real mitigating factors at Transnet and probably these will be hedged out. I think the $1 billion that matures now had cross-currency hedges in place to address the currency risk.

FIFI PETERS: All right, Lindani, thanks so much for those insights. It’s not often that we talk about complicated things like bonds and credit, but thanks for simplifying the matter for us. Lindani Vezi is an investment analyst for listed credit at Futuregrowth.



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