Two-Tone Shoes for Transnet CEO After Bond: South Africa Credit

When Transnet SOC Ltd. sold its first rand bond to foreign investors in November, Chief Executive Brian Molefe celebrated by buying a pair of two-tone shoes at an upmarket store on New York’s Madison Avenue.

“A special pair of shoes that I wore on pricing day,” Molefe, 47, said in an interview in Johannesburg on Feb. 4. “All my bonus was gone there. I was really so excited about that deal.”

His confidence wasn’t misplaced. While the state-owned rail and ports operator paid 100 basis points more than its domestic debt to sell the bonds, the spread has since narrowed 30 basis points even as the currency weakened 8 percent against the dollar. The yield on the May 2021 security climbed 40 basis points this year, compared with 57 basis points for lira-denominated bonds sold to foreign investors last year by Turkey’s Akbank TAS.

By borrowing in rand, Transnet avoided repaying dollars or euros using revenue denominated in the world’s most volatile major currency. The Johannesburg-based company, South Africa’s second-biggest corporate borrower, after Eskom Holdings SOC Ltd., is chasing new markets to reduce costs and diversify funding sources as it raises 87.7 billion rand ($8 billion) over six years to fund new port terminals in Durban and boost rail capacity for commodities.

“It was a good issue for Transnet,” Rashaad Tayob, who helps manage the equivalent of $6 billion including Transnet bonds at Abax Investments, said by phone from Cape Town on Feb. 7. “They got it at a decent spread and they didn’t have to worry about currency hedging, which can be costly.”

Try Again

Molefe, who is a member of the South African National Defense Force’s reserves and an honorary colonel in the South African Irish Regiment, tried to sell a rand-denominated international bond while working as manager of government assets and liabilities in the National Treasury before 2003.

While unsuccessful, Molefe returned to the idea when he arrived at Transnet three years ago after a stint as head of the government pension fund manager. Transnet paid 9.5 percent on Nov. 6 to raise 5 billion rand from the bonds that were marketed in the U.S. and U.K., with Lazard Ltd., Loomis Sayles & Co. and Massachusetts Financial Services among the buyers, according to data compiled by Bloomberg.

Transnet was willing to pay more than price guidance of 9.25 percent to set a benchmark for a new source of funding, Molefe said at the time. If Transnet raised the equivalent of 5 billion rand in dollars, the cost of the transaction, including currency and interest-rate swaps, would have been about 230 basis points more than what it paid, he said.

Hedged Exposure

While the rand’s decline threatens to wipe out returns for investors, most would have hedged, Abax’s Tayob said. South Africa’s currency weakened 0.8 percent to 11.1532 per dollar by 6:06 p.m. in Johannesburg for a slump over the past 12 months of 20 percent.

“If they hedged out their rand exposure, they’re just sitting with the yield pickup and they just have to take a view on Transnet and credit risk,” Tayob said. “Or they could take a view on the rand and just sit it out.”

While state-owned companies such as Eskom, which produces most of the nation’s power, and South African National Road Agency SOC Ltd. borrow with government guarantees, Transnet is tapping markets on the strength of its own balance sheet with only 4 percent of its debt backed by the Treasury.

Profitable Monopoly

The yield on Transnet’s 7 billion rand of 10.8 percent domestic bonds due November 2023 has climbed 58 basis points this year to 9.68 percent amid a selloff in emerging-market debt sparked by the Federal Reserve’s tapering of asset purchases. The yield on dollar bonds maturing in July 2022 declined 12 basis points.

Transnet, which owns and manages 20,500 kilometers (12,700 miles) of freight rail, eight ports, 16 terminals and 3,800 kilometers of pipeline, reported after-tax profit of 2.9 billion rand for the six months through September as revenue rose 14 percent. The company’s businesses are “monopolistic” and will stay profitable even if commodity exports weaken, Fitch Ratings said in October, when it lifted the company’s debt two levels to the second-lowest investment grade.

With the global rand bond, Transnet completed its budgeted 15.6 billion rand of borrowing for the fiscal year ending March 31. Transnet has 86 billion rand of debt outstanding, including $1.75 billion of foreign debt, compared with 236 billion rand for Eskom, according to data compiled by Bloomberg.

Market Turbulence

“Transnet will be able to raise funding offshore,” Janine Pein, a credit analyst at Nedbank Group Ltd.’s investment banking unit, said in an e-mailed response to questions Feb. 7. “I doubt that it will attempt to raise funding at the moment because the cost of raising funding is likely to be high given current market turbulence. I would expect Transnet to wait until markets have settled.”

The company will continue to diversify financing sources, while keeping foreign-currency exposure in check, Molefe said. Transnet turned down an offer for a loan of as much as $5 billion from China Development Bank Corp. last year to help pay for new locomotives, because it didn’t need the money, he said. They could reconsider that decision if necessary, Molefe said.

“We try to minimize our exposure to foreign currencies because actually we have very little dollar revenue,” he said. “We have to keep several options open at any point in time. It’s not to get exposure to foreign currencies but to get access to markets.”

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