Transnet, the transport parastatal, is seeking to cut borrowing costs in an R86 billion funding drive by considering sales of samurai bonds and sukuk along with loans from China.
“The more sources of funding you have, the better position you are in” to reduce debt service payments, chief executive Brian Molefe said at Transnet’s headquarters in Johannesburg’s Carlton Centre on Monday.
Transnet is considering selling yen-denominated debt after Bank of Japan governor Haruhiko Kuroda doubled monthly bond purchases, sending the nation’s bond yields to record lows. South Africa and Nigeria are among African nations weighing Islamic financing as a source of funds.
Global sukuk sales may climb to as much as $60 billion (R550bn) in 2013, 30 percent more than last year’s record, according to a February forecast by HSBC.
Yields on Transnet’s $1bn of bonds due in July 2022 have lost 47 basis points this month to 4.16 percent, compared with the 1 basis point decline to 5.8 percent for the average yield in the JPMorgan Chase transport sector index.
More than two-thirds of Transnet’s costs to fund expansion were expected to come from operating cash flow, with the rest to be raised from debt markets, the utility said last year. Transnet expected to be able to raise funds from both domestic and international markets, Molefe said this week.
“Should there be a problem in our traditional markets, which are the EU and the US, we can explore new markets like the samurai or the sukuk,” Molefe said.
Transnet signed a co-operation agreement with China Development Bank at last month’s Brics (Brazil, Russia, India, China and South Africa) summit in Durban. This could lead to funding assistance although a deal had yet to be agreed on, Molefe said.
“Diversification from a geographic perspective would be a prudent strategy,” Mohammed Nalla, the head of strategic research at Nedbank Capital, said. “In terms of timing, it would be opportune because we have record low rates globally.”
South African government bonds maturing in over a year have returned more than 51 percent since the beginning of 2009, making them the world’s third-best performing bonds for the period out of 26 sovereign indices monitored by the European Federation of Financial Analysts Societies and Bloomberg.
Borrowing costs should remain favourable with domestic growth sluggish, Molefe said. The Reserve Bank predicts the economy will expand 2.7 percent this year, compared with 2.5 percent last year.
Manufacturing output unexpectedly contracted in February as stagnant domestic and global growth curbed demand, offsetting the benefits of a weaker rand, which typically boosts exports.
“I see the spreads narrowing going forward,” Molefe said. “I see our debt becoming cheaper.”
Transnet, which owns and manages eight ports, 20 500km of railway line and 3 000km of fuel pipelines, started a seven-year, R300bn plan to improve infrastructure last year.
South Africa needs to increase its capacity to boost exports of coal, manganese and other commodities to take advantage of mineral resources classified as the world’s most valuable by Citigroup in 2010.
“Given Transnet’s strong balance sheet, credit rating and management team they should be well received in offshore markets – particularly markets looking for yields in a low-yield environment,” Marshall Brown, a portfolio manager at Investec Asset Management, said on Wednesday. “This will of course depend on the stability of markets.”
The company previously shed its loss-making SAA unit and a passenger rail service, and lifted earnings before interest, tax, depreciation and amortisation by 7.1 percent to R10.1bn in the six months to September last year.
Transnet has R51.4bn of debt in bonds, with 58 percent reaching maturity by 2022, according to data. Total borrowings including loans were R71.2bn as of September last year, according to the company.
Last year the company sold a $1bn bond due in 10 years, its longest ever maturity in international markets.
“Indications are we should be able to have longer-term debt paper in the market,” Molefe said. “It’s something we will consider depending on price and appetite from investors.”
Transnet has not set a target ratio for local and foreign debt as all international loans are immediately converted into rand. “The rate risk is hedged” to limit our exposure, Molefe said. – Bloomberg