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Cape Town - Fitch Ratings has revised the outlook on Transnet to negative from stable and affirmed its long-term foreign-currency issuer default rating (IDR) and long-term local-currency IDR at 'BBB-'.
"The revision follows the change in Outlook on South Africa's Long-Term IDR to Negative from Stable and the weakened standalone profile as we expect key ratios such as funds from operations (FFO) net leverage and FFO fixed charge coverage to weaken," it said in a statement on Wednesday.
Fitch expects pressure on Transnet's standalone profile of 'BBB-' over the next 18-24 months if freight volumes do not grow.
Fitch understands the company's Market Demand Strategy (MDS) is a long-term plan and is a counter cyclical investment strategy. However, its standalone credit profile would be negatively affected if volumes suffer from a weak economic growth lasting into financial year-ending March 2018 (FY18) and FY19 without a reduction in capex and operational costs and credit metrics continue to weaken.
Low economic growth is expected to continue with Fitch forecasting GDP to grow 0.5% in 2016 before recovering to 1.3% in 2017.
Transnet has refocused MDS to capex linked to 'validated demand' from 'building capacity ahead of demand' due to subdued economic growth and to protect its balance sheet. It has also reduced the guidance for the third consecutive year to a range of R255bn and R278bn for 2017-2023, with the ability to optimise further to ensure that credit rating ratios are managed.
"Although expansion is driven by customer demand, risk of excess capacity cannot be ruled out for the short-to medium-term amid significantly weaker world commodity markets.
"However, the risks and the associated funding challenge are mitigated in that only about 50% of future capex is committed with the remaining portion being modular and flexible with cuts possible," the ratings agency said.
The MDS capital investment plan will be one-third funded by debt and the balance by cash from operations, according to management. But Fitch estimates that the debt-funded portion will be higher than one-third due to lower cash from operations than management's estimates.
"Offsetting this is that we estimate lower capex at about R20bn for FY17 as key customers defer expansion plans."
