S&P Global Ratings has initiated a credit watch for Transnet, the South African state-owned logistics entity, indicating concerns regarding its financial stability and operational efficiency. The decision to place Transnet on credit watch is driven by uncertainties about the effectiveness of its restructuring efforts in improving cash flow and reducing leverage, potentially leading to a downgrade.
Transnet is implementing a recovery strategy to address its escalating challenges. Despite maintaining a 'BB-' rating for Transnet's senior unsecured debt and a 'BB' rating for its $190 million (R3.5 billion) government-backed debt, S&P underscores the need for Transnet to address its high leverage and revamp its capital structure.
Michelle Phillips, Transnet Group CEO, has acknowledged these challenges yet remains optimistic about the recovery blueprint sanctioned in October 2023. S&P anticipates a gradual operational recovery for Transnet but questions whether cash flow improvements will be sufficient and timely to sustain its liquidity and leverage ratios.
Debt is projected to increase from $7.5 billion (R134.7 billion) in fiscal 2024 to $8.4 billion (R151 billion) by fiscal 2025. This, coupled with significant capital expenditure and annual interest costs of $940 million (R17 billion), heightens Transnet's financial pressure. Phillips emphasizes the importance of ongoing measures to improve operational and financial performance, aiming to position Transnet as a driver of economic growth.
S&P highlights the critical role of government support in Transnet's recovery, referencing past financial aid and a $2.6 billion guarantee framework for fiscal 2024. However, the agency warns that additional substantial support may be necessary to address Transnet's liquidity and structural challenges effectively.
The report also outlines operational and financial hurdles, including the goal to handle 170 million metric tons of freight by fiscal 2025, amid risks such as vandalism and infrastructure damage. Despite these efforts, S&P projects Transnet's revenue could reach $4.55 billion to $4.89 billion (R82 billion to R88 billion) by fiscal 2026. However, its high debt levels and fixed costs are expected to keep its debt-to-Ebit ratio above 5x, with continued negative cash flow in the near term.
Additionally, S&P highlights broader social and governance issues affecting Transnet, including infrastructure damage from criminal activities and historical governance lapses that impede operational efficiency. While improvements in governance have been noted, S&P believes more time and commitment are required to rebuild stakeholder trust.
Source: IOL