Transnet unfazed by downgrades, economic ills

[miningmx.com] – TRANSNET, South Africa’s transport utility, was unfazed by recent credit downgrades amid a decline in the country’s economic growth rate saying it would continue to finance its R300bn expansion programme.

Ratings agencies Fitch and Standard & Poor’s recently downgraded South African utility companies, including Eskom, following an earlier adjustment of the government’s long-term local and foreign currency ratings. The result was that Transnet would have to refinance about R8bn worth of debt which equates to a R41m cost.

The South African economy contracted 0.6% in the first quarter, a development partly blamed on the five-month strike in the platinum sector by the Association of Mineworkers & Construction Union (AMCU), now ended.

The company’s credit rating was “… not below investment grade so can get away with it relatively comfortably,” said Brian Molefe, CEO of Transnet. “The bulk of debt would need to be repriced if it was below investment grade,” he said.

He added that although the company would remain flexible on its expansion programme, known as the Market Demand Strategy (MDS), it had no plans to pull back on its spending. This is despite softening global economic decisions for commodities Transnet exports such as coal.

“The assets we are procuring have a life of 50 years, so we are not procuring for this cycle of low growth,” said Molefe.

“Despite the lower-than-expected volumes and revenue, MDS will continue. We will moderate our MDS spending to be in line with affordability.

“We are not about to bust our gearing ratios or interest cover multiple. If those are under threat, we will revise MDS numbers down,” he said.

Molefe was commenting at Transnet’s full-year results ended-March 31 presentation in Johannesburg in which the group posted a one quarter increase in profit to R5.2bn. Capital investment increased 15.6% to R31.8bn but gearing was up marginally to 45.9%. In terms of its debt covenants, Transnet cannot exceed gearing of 50%.

Transnet had to raise R20bn to R22bn in funding this year in order to complete capital spending of about R33bn mostly on locomotivs, wagons, and its rail replacement programme and port equipment. “We do not expect any impact owing to downgrade at financials are quite robust,” he said.

Siyabonga Gama, CEO of Transnet Freight Rail (TFR), a division that contributed half of Transnet’s R56.6bn in revenue in the financial year, said that the coal markets remained relatively robust despite a decline in the average price to $83/t.

“In terms of exports, a number of the developed world nations will continue to buy coal from us,” said Gama. “Most of them are divesting from nucler plants and saying that want to import more coal from us,” he said.