Moody's downgrades Transnet outlook

Johannesburg - Rating agency Moody's has changed its rating outlook on transport parastatal Transnet's A3/P-2 to negative from stable.

Moody's said its decision was driven primarily by the change in outlook on SA's government bond ratings, but also by the overall execution risk of its significant capex programme over the next five years, as well as the potential pressure to accelerate its current capital expenditure programme.

"In the past years, though, Transnet has successfully implemented over 90% of its budgeted capital investment programme," it said.

Transnet's A3/Aa3.za/Prime-2 ratings remained unchanged.

The company's A3 rating reflected the combination of the following inputs including a baseline credit assessment (BCA) of seven (equivalent to an A3 rating on the long-term scale), the A3 local currency government rating for SA, a very high dependence, and high support.

Moody's said that the lack of uplift to Transnet's BCA reflected the assumed high default correlation between Transnet and SA's sovereign rating, so that uplift above the rating of SA was not considered appropriate.

"At the same time, the very high dependence of Transnet on the South African government largely explains why the negative outlook on the South African sovereign rating has an impact on Transnet's outlook as well.

"While the government support does not currently provide any uplift to Transnet's ratings, Moody's nevertheless expects it to mitigate to some extent any potential decline in Transnet's creditworthiness," the ratings agency said.

In Moody's view, the key credit factors likely to impact Transnet's standalone credit profile (or its BCA) over the next few years included the potential increase in debt that would be needed to meet the large capex plans in the event that they were substantially increased as part of possible government stimulus measures, as well as the tariffs Transnet would be able to charge to recover the cost of such increased capital spending, Moody's said.