Overview
-- On Oct. 12, 2012, we lowered our foreign currency sovereign ratings on
the Republic of South Africa to 'BBB/A-2' from 'BBB+/A-2' and the local
currency sovereign ratings to 'A-/A-2' from 'A/A-1'.
-- We consider South African infrastructure provider Transnet SOC Ltd.
(Transnet) to be a government-related entity (GRE) under our criteria and
assess the likelihood of extraordinary support from the state, if needed, to
be "extremely high."
-- In accordance with our GRE criteria, we are lowering our foreign
currency long-term rating to 'BBB' from 'BBB+', affirming our 'A-' local
currency long-term rating at 'A-' and Transnet's long and short-term South
Africa national scale rating at 'ZaAA+' and 'ZaA-1' respectively.
-- The negative outlook mirrors that on South Africa, and reflects the
possibility that a further downgrade of the sovereign would likely result in a
further downgrade of Transnet.
Rating Action
On Oct. 16, 2012, Standard Poor's Ratings Services lowered its foreign
currency long-term corporate credit rating on South African infrastructure
provider Transnet SOC Ltd. to 'BBB' from 'BBB+'. At the same time, we affirmed
the 'A-' local currency long-term corporate credit rating, and the 'ZaAA+'
long-term and 'ZaA-1' short-term South Africa national scale ratings on the
company. The outlook remains negative.
Rationale
The rating actions on Transnet follow our downgrade of the Republic of South
Africa on Oct. 12, 2012 (see "South Africa FC Long-Term Rating Lowered To
'BBB'; LC Ratings Lowered To 'A-/A-2'; Outlook Remains Negative," on
RatingsDirect on the Global Credit Portal). We consider Transnet to be a
government-related entity (GRE). In accordance with our criteria for rating
GREs, we have lowered the foreign currency long-term rating on Transnet.
The ratings on Transnet continue to reflect the company's stand-alone credit
profile (SACP), which we assess at 'bbb+', as well as our opinion that there
is an "extremely high" likelihood that the South African government would
provide timely and sufficient extraordinary support to Transnet, in the event
of financial distress.
In accordance with our GRE criteria, our view of the ''extremely high''
likelihood of government support is based on our assessment of Transnet's:
-- "Critical" role for South Africa, owing to its position as the
monopoly infrastructure provider in freight rail, port ownership, and
pipelines, and its dominant position in port operations; and
-- "Very strong" link with the government through South Africa's 100%
ownership, and its oversight of Transnet's strategy, funding plans, and
regulation.
The SACP reflects Transnet's business risk profile, which we assess as
"strong" under our criteria. We factor in the company's dominant business
positions in the South African economy, continued operational and financial
improvements, and high and increasing profitability.
These strengths are partially offset by Transnet's financial risk profile,
which we view as "significant;" the funding risk associated with its large
capital works program and scheduled debt maturities, exposure to changes in
the South African economy, an expected increase in debt over the next two to
three years, and regulatory uncertainty in its regulated divisions.
Liquidity
We assess Transnet's liquidity as "adequate" under our criteria, factoring in
potential extraordinary liquidity support from the government. Foreign
currency debt is limited and fully hedged, but we anticipate that it will
likely increase over time to reflect the foreign currency requirements of the
company's procurement program.
On June 30, 2012, Transnet reported cash and cash equivalents of about South
African rand (ZAR)2.3 billion (ZAR8.2 billion on Sept. 30, 2012), and ZAR7
billion (ZAR7.9 billion on Sept. 30, 2012) of committed undrawn credit lines.
We anticipate that Transnet will generate about ZAR15 billion of funds from
operations over the 12 months to June 30, 2013. In contrast, we forecast that,
over the same period, capital expenditures will reach about ZAR14 billion to
ZAR18 billion while debt repayments will total about ZAR4.4 billion. Transnet
has indicated it intends to raise about ZAR14.1 billion this year, of which it
has already raised about ZAR14.7 billion at the time of writing.
In assessing the company's adequate liquidity, we factor in our view of
Transnet's good relationships with banks, strong credit standing in financial
markets, and prudent financial policy. We also consider that Transnet has a
credible plan to meet cash uses over the next few months. In early March,
Transnet rolled over the bulk of its ZAR7 billion club loans for a further two
years to March 2014, and repaid about ZAR1.5 billion through cash balances. In
July, Transnet successfully issued US$1 billion, 4% senior notes to finance a
significant ramp-up in capital expenditure as part of its Market Demand
Strategy.
Outlook
The negative outlook on Transnet's foreign and local currency ratings reflects
that on the Republic of South Africa and the possibility that a further
downgrade of South Africa's ratings could lead to a downgrade of Transnet's
ratings under our GRE criteria.
All else being equal, a revision of the outlook on South Africa to stable
would likely lead to a similar action on Transnet.
A positive or negative change in our view of Transnet's relationship with the
sovereign, resulting in a change in our opinion of the likelihood of
extraordinary government support available to the company, could result in an
upward or downward rating action on Transnet. A weakening in our assessment of
Transnet's SACP could lead to a downgrade of Transnet, assuming the sovereign
rating and our view of the likelihood of government support remain unchanged.
Related Criteria And Research
-- South Africa FC Long-Term Rating Lowered To 'BBB'; LC Ratings Lowered
To 'A-/A-2'; Outlook Remains Negative, Oct. 12, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec.
9, 2010
-- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
-- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For
Corporate And Sovereign Issuers, May 15, 2012
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
Ratings List
Downgraded
To From
Transnet SOC Ltd.
Corporate Credit Rating
Foreign Currency BBB/Negative/-- BBB+/Negative/--
Senior Unsecured
Foreign Currency BBB BBB+
Ratings Affirmed
Transnet SOC Ltd.
Corporate Credit Rating
Local Currency A-/Negative/--
South African National Scale zaAA+/--/zaA-1
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.
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