Transnet’s Rating Raised to Investment Grade by Fitch

Transnet SOC Ltd., South Africa’s state-owned ports and rail operator, was raised to investment grade by Fitch Ratings, which cited the company’s ability to repay debt even without a government guarantee.

Transnet is spending 308 billion rand ($31 billion) over a seven-year period to improve port and rail infrastructure, with two-thirds allocated to rail. It plans to fund the program partly with debt raised in domestic and international markets. The National Treasury, which according to Transnet backs 4.3 percent of the company’s debt, said Oct. 23 state-owned companies will have to borrow against their own balance sheets.

The upgrade “reflects our expectation that Transnet’s future debt will not be guaranteed by its parent,” Fitch’s Johannesburg-based analysts Yeshvir Singh and Darshak Juta said in an e-mailed statement. “Transnet’s credit profile benefits from its monopolistic position in the country’s rail, port and pipeline services, with a long-term contract base and business diversification underpinning strong operating cash flows.”

Fitch lifted Transnet’s long-term foreign-currency rating two levels to BBB, its second-lowest investment-grade level, with a stable outlook. The new rating is on par with South Africa’s sovereign rating. Transnet is “confident” that its investment plans “will enable us to maintain or improve our current credit rating,” Chief Executive Officer Brian Molefe said in an e-mailed statement.

Transnet’s operations will remain profitable even if commodity export markets weaken, Fitch said, adding that the company will probably scale back capital expenditure if not warranted by demand. The company has 76.8 billion rand of debt, according to data compiled by Bloomberg.

Yields on Transnet’s $1 billion of 4 percent bonds due July 2022 dropped 11 basis points, or 0.11 percentage point, to 5.49 percent as of 5:05 p.m. in Johannesburg, narrowing the premium over similar-maturity U.S. Treasuries by nine basis points to 294.

(Corrects amount of debt backed by South African government in second paragraph for story published Oct. 30.)
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