When Transnet sold its first rand bond to foreign investors in November last year, 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 said last week. “All my bonus was gone there. I was really so excited about that deal.”
His confidence was not misplaced. While the state-owned logistics 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 rand has fallen 8 percent against the dollar. The yield on the May 2021 security has risen 40 basis points this year, compared with 57 basis points for lira-denominated bonds sold to foreign investors last year by Turkey’s Akbank.
By borrowing in rand, Transnet avoided repaying dollars or euros using revenue denominated in the world’s most volatile major currency. The company, South Africa’s biggest corporate borrower after Eskom, is chasing new markets to reduce costs and diversify funding sources as it raises R87.7 billion over six years to fund new port terminals in Durban and boost rail capacity for commodities.
“It was a good issue for Transnet,” Abax Investments portfolio manager Rashaad Tayob said on Friday.
“They got it at a decent spread and they didn’t have to worry about currency hedging, which can be costly.”
Molefe had 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 November 6 to raise R5bn from the bonds that were marketed in the US and UK, with Lazard, Loomis Sayles and Massachusetts Financial Services among the buyers.
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 R5bn 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.
Rand risks
While the rand’s decline threatens to wipe out returns for investors, most would have hedged, Tayob said.
The rand has fallen 20 percent over the past 12 months.
“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 entities such as Eskom and the SA National Roads Agency 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.
The yield on Transnet’s R7bn of 10.8 percent domestic bonds due in November 2023 has climbed 58 basis points this year to 9.68 percent amid a sell-off in emerging-market debt sparked by the US Federal Reserve’s tapering of asset purchases. The yield on dollar bonds maturing in July 2022 has declined 12 basis points.
Transnet, which owns and manages 20 500km of freight rail, eight ports, 16 terminals and 3 800km of pipelines, made after-tax profit of R2.9bn for the six months to September last year as revenue rose 14 percent.
The company’s businesses were “monopolistic” and would stay profitable even if commodity exports weakened, 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 R15.6bn of borrowing for the fiscal year. Transnet has R86bn of debt outstanding, including $1.75bn (R18bn) of foreign debt, compared with R236bn for Eskom.
Market turbulence
“Transnet will be able to raise funding offshore,” Janine Pein, a credit analyst at Nedbank’s investment banking unit, said on Friday. “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.”
Transnet would 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 $5bn from China Development Bank last year to help pay for new locomotives, because it did not need the money, he said.
“We try to minimise 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.” - Bloomberg