Transnet in serious trouble

Transnet has breached its debt covenants, forcing it to request lenders to waive their covenant breach and not trigger the default event.

This was revealed in Transnet’s unaudited condensed consolidated financial results for the six months ended 30 September 2024.

The state-owned enterprise’s revenue increased by 6% to R41.5 billion, in line with the weighted average tariff increases in the rail, port, and pipeline businesses.

However, operating expenses increased even faster. It jumped 10.2% to R27.9 billion due to increased personnel, security, energy, maintenance, and material costs.

This resulted in a loss of R2.17 billion for the six-month period, up from a loss of R1.58 for the comparable period the previous year.

The most important part of Transnet’s financial results was its debt. Interest-bearing debt increase from R129 billion in 2023 to R136 billion in 2024.

This increased the state entity’s debt ratio from 35.9% to 37.5% within a year. This means that 37.5% of Transnet’s total assets are financed by interest-bearing loans.

Transnet’s operating profit of R4.4 billion was, therefore, entirely nullified by the 2024 interest expense of R7.4 billion.

The heavy interest burden caused by the debt caused Transnet to breach several of its debt covenants, which are viewed as default events.

Debt covenants are limitations that lenders impose to ensure that the organisation to which they lend money maintains a minimum level of creditworthiness.

These measures are to give lenders peace of mind that the organisation will be able to pay them back.

If a debt covenant is breached, the lender has the right to immediately lay a claim on their entire loan and can seize company assets to recoup their debt.

Many of Transnet’s debt covenants require a cash interest coverage ratio (CIC Ratio) of 2 times, and some require a CIC ratio of 2.5 times.

This means that Transnet’s EBITDA, basically the group’s operating profit after adding back depreciation, should be able to at least cover the group’s interest expense 2 times.

Transnet could only cover its interest expense 1.9 times with its EBITDA figure. This was lower than the required cash interest coverage ratio.

Therefore, the debt covenants were breached. Transnet requested that its lenders waive their covenant breach and not trigger the default event.

Simply put, Transnet had to go hat in hand to its lenders to stop them from laying claim on their loan or seizing company assets to recoup their debt.

The good news is that all the waivers submitted to Transnet’s lenders were accepted, giving the state-owned enterprise some breathing room.