S&P Global Ratings downgrades Transnet's credit ratings

S&P Global Ratings (S&P) has downgraded Transnet's credit ratings due to high debt and negative operating cash flow.

It lowered the long-term local currency and foreign currency ratings from BB- to B+. The standalone credit profile was downgraded from 'b' to 'ccc+', while its national scale rating was changed from 'zaAA-/zaA-1+' to 'zaA/zaA-1'. 

It kept the outlook stable and said it reflects S&P's view that Transnet will not face any material payment or liquidity events given the current R51 billion government guarantee framework.

S&P highlighted several issues in its rating report.

"The downgrade reflects the incremental deterioration of the financial profile in the past few years that extraordinary government support could partly mitigate but will not fully offset in our view, especially as the support is principally in the form of government guarantees," it said.

It said Transnet is entirely dependent on state support to be able to service its debt. This is due to sizable negative free operating cash flow (FOCF) and its unsustainable capital structure without government support.

"We think that the substantial support provided by the government in the form of guarantees underpins Transnet’s access to funds to refinance its upcoming debt maturities, which, in our view, would otherwise have been extremely challenging," it said.

However, structural business weaknesses remain and will take time to improve materially. Notably, S&P expect low cash flow generation capacity to persist in the next few years andhinder its ability to sustain or substantially improve its current leverage and capital structure.

Based on S&P's updated forecasts, it thinks that Transnet’s credit metrics will remain weak over fiscal years 2025 and 2026, ending March 31, despite gradual improvement in volumes.

It expects Transnet’s key segment, Transnet Freight Rail (TFR), to report rail volumes of approximately 160.8 million metric tonnes (mt) for fiscal 2025, compared to 151.7 million mt in fiscal 2024 and relative to a target of 170 million mt for the year.

Anticipated growth in commodity volumes drives Transnet’s corporate plan for TFR volumes to increase to approximately 180 million mt in fiscal 2026 and further to about 188 million mt in fiscal 2027.

Given the extent of network rehabilitation required due to maintenance backlogs, aged infrastructure, and ongoing security incidents, S&P expects TFR volume recovery to fall short of budgeted projections under its basecase. Nonetheless, it anticipates that the recovery in rail volumes, coupled with improved availability of port equipment, will support revenue growth to approximately R82bn in fiscal 2025 and to about R87bn  in fiscal 2026 compared with R76.7bn in fiscal 2024.

However, given Transnet’s high fixed-cost base, S&P expects that Transnet will generate Ebitda margins of about 30%-34% over fiscal years 2025 to 2027, equivalent to Ebitda of approximately R25bn-R30bn compared with R21bn in fiscal 2024.

With structurally high cash uses because of persistently high levels of debt and related interest payments, S&P forecasts the company will generate adjusted annual funds from operations of R8bn-R14bn over fiscal years 2025 and 2026.

At the same time, Transnet’s substantial annual capital expenditure requirement of about R25bn  annually, is critical to the company’s operational recovery and cannot be meaningfully reduced without adverse consequences. Nonetheless, elevated capital requirements (previously R12bn - R14bn annually) will drive persistently negative adjusted FOCF flow of about R13.5bn annually in the next few years. This compares with negative FOCF of R2.6 billion in fiscal 2024.

"Therefore, in our view, Transnet is now exposed to greater negative free cash flows relative to previous years," it said.

Michelle Phillips, the CEO of Transnet, said, "We are confident that the strides made to date to improve Transnet's operational and financial challenges have set the company on the right trajectory. This will enable Transnet to deleverage its balance sheet and focus on optimizing its capital investment programme to restore the network.

"The government guarantees will be deployed to ensure that the appropriate level of liquidity is maintained to service all Transnet's obligations. We have noted the ratings action by S&P Ratings, and our immediate and ongoing focus includes actively implementing the focused interventions to enhance our operational and financial performance," she said.

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