Fitch said the upgrade reflected its updated view of Transnet's standalone profile as BBB- and a change to a bottom-up rating approach from a top-down approach within Fitch's parent and subsidiary rating linkage criteria reflecting its expectation that Transnet's future debt will not be guaranteed by its 100% parent‚ the government SA (BBB/BBB+/stable).
"We thus view Transnet's legal links with the sovereign as limited. However‚ the rating includes a single-notch uplift to reflect the strong strategic and operational links between Transnet and its parent."
According to the rating agency‚ Transnet's credit profile benefits from its monopolistic position in the country's rail‚ port and pipeline services‚ with a long-term contract base and business diversification underpinning its strong operating cash flows. Structural weaknesses in the operating environment (including wage pressures and evolving regulatory framework)‚ together with expected negative free cash flows and substantial funding needs due to large capex‚ constrain the ratings.
"The stable outlook incorporates our expectations that Transnet's operations will remain strong‚ despite possible weakening in commodity export markets‚ and that management would scale back its capex in case of weaker demand expectations to maintain the company's financial profile in line with stated targets. We expect funds from operations net adjusted leverage to slightly exceed 4.0x by the financial year to March 2016 (compared with 3.1x at financial year end 2013) a level still commensurate with the current ratings‚" Fitch said.
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