Less than two weeks since Transnet announced the firms that won a tender to manufacture 1 064 locomotives for its freight rail business, it has secured a R3 billion loan facility from four major banks. FirstRand Bank, Rand Merchant Bank, China Construction Bank and KFW Development Bank of Germany signed funding agreements with Transnet this week.
The capital raised would partly be used to fund advance payments to the four companies announced earlier this month as the winners that would share South Africa’s biggest locomotive tender.
All agreements, signed individually, had a five-year term and Transnet group chief financial officer Anoj Singh said as far as the cost of funding was concerned, they compared favourably with a benchmark against the local bond market.
“If you look at the spread of South African banks, Chinese and German banks that are going to support a South African state-owned company, this further evidences that it is an attractive investment proposition for potential investors,” Singh said.
Transnet expected to fund about R200 billion of its R350bn market demand strategy from its own operations. Singh said the same split, where only one-third of the funding was sourced externally would, apply for the locomotives order.
He expected that the logistics utility would raise more capital for this project from Chinese, US and Canadian export credit agencies as these were the markets where some locomotives parts would be exported from. Transnet would then use its global medium-term note programme, which allows it to access US, European and Far East investors.
As the utility approached these capital markets, it expected to see the same level of success as it had in its previous bond issue transactions or more if the interest shown by its traditional investors was any indication to go by, said Singh.
While Transnet tends to keep all its funding initiatives aligned, for the locomotives capital raising, it would make use of the export credit agencies as about 40 percent of the content would be foreign.
For the electric locomotives, the minimum local content criteria was set at 60 percent while it was 55 percent for the diesel locomotives.
“In that case you can make use of export credit agencies that would allow you to have a very favourable cost of debt for these locomotives,” said Singh.
The way in which the agreements with the locomotives manufacturers were constructed allows Transnet a window period of more than two years to raise the required funding. Between 70 percent and 80 percent of contract value is only payable upon delivery of the locomotives.
Singh said not only was this done to give Transnet enough time to raise the capital needed, but it was an intentional risk mitigation measure to ensure the companies delivered the locomotives and that Transnet was satisfied with their performance before it paid.
Singh indicated that the company would fund the upgrades of Transnet Rail Engineering’s Durban and Koedoespoort manufacturing plants internally. These are the plants where all the locomotive parts, excluding engines and traction motors, would be manufactured and almost 1 000 locomotives would be assembled.
The upgrade in Pretoria had already been completed and to upgrade the Durban plant to two production lines would require about R350 million.