Transnet, the state-owned ports and rail operator, is resuming a R900 million monthly funding programme as slowing growth at home amid a worldwide commodity slump sends yields higher.
A surplus in the global supply of iron ore and coal means Transnet is facing a drop in haulage revenue amid a seven-year investment plan to build new railway tracks and renew harbour infrastructure.
The economy is forecast to expand 1.5 percent this year, the slowest pace since 2009, while other state-owned companies such as Eskom also compete for market funding.
The premium investors demand to hold Transnet’s rand bonds due February 2025 rather than similar-maturity government debt widened 33 basis points this month to a record 193, according to data.
The Johannesburg-based company sold R400m of securities due October 2030 more than a week ago with a coupon of 10.5 percent, compared with the average 5.2 percent yield of emerging market corporate debt tracked by JPMorgan Chase indexes.
“It’s inevitable that credit spreads over government bonds are going to increase for state-owned companies, including Transnet,” Jean-Pierre du Plessis, an investment strategist at Prescient Investment Management, said on Tuesday.
“There’s slow economic growth. There’s a huge funding demand from state-owned companies. The scale of the funding required is worrying.”
South Africa has been hurt this year by strikes in the platinum and manufacturing industries, prompting the Reserve Bank to cut its growth forecasts. Iron-ore prices have fallen more than 50 percent since peaking in 2011 as producers including BHP Billiton and Fortescue Metals Group expand supplies, pushing the market into a glut. Coal prices have also fallen.
“We are happy with the rates that we obtained as they are in line with current market conditions,” Transnet spokesman Mboniso Sigonyela said on Friday, referring to the October 6 bond sale. “We didn’t give out any guidance, but we are not surprised with the rates, given the fact the bonds are maturing in 2030 and 2040.”
Yields on fixed-rate rand bonds due December 2026 declined 10 basis points to 7.94 percent by 3.41pm in Johannesburg, compared with 8.25 percent at the end of 2013. The rand firmed 0.7 percent to R10.9772 a dollar, paring losses this year to 4.8 percent. At 5pm the rand was bid at R11.03.
Transport of iron ore and coal accounted for 58 percent of Transnet Freight Rail volume in the year to March, according to the company’s annual report. Transnet said in the document, published earlier this year, that it planned to move a combined 133.5 million tons of the commodities this year, a 9 percent increase.
Transnet’s funding requirements will be about R74 billion over the next four years. Of that amount, R18.7bn will be sought through bonds sold on the domestic market, according to the company.
“Transnet has a large capital expenditure programme, with assets that will take time to be completed,” Janine Pein, a credit analyst at Nedbank Group’s investment banking unit, said. “Transnet are merely matching their liability and asset profiles.”
Eskom is facing a R225bn funding shortfall through 2018, as it seeks to expand generating capacity about 40 percent.
Funds will be raised through bond sales and to a lesser extent from the disposal of state assets, according to Finance Minister Nhlanhla Nene.
“It seems that the extent of the need for funding from most state-owned enterprises… could outweigh the demand, which could lead to the spreads widening,” Bronwyn Blood at Cadiz Asset Management said. “Investors are recognising that Transnet’s performance is likely to be impacted by the slow economic growth.” – Bloomberg