Transnet infrastructure finance case study

Over the past decade, Freshfields has cultivated a trusted relationship with Transnet SOC Ltd (Transnet), the state-owned operator, owner and custodian of a major portion of South Africa’s transport infrastructure, specifically its railway, ports and pipeline. Our advisory role has been instrumental, particularly in helping to secure external debt funding. Due to the capital-intensive nature of Transnet's operations, securing external funding is vital to maintaining and expanding their infrastructure.

In November 2021, a Freshfields team, led by Duncan Kellaway and Doug Smith worked with Transnet to initiate a process to raise US$1bn through a bond issuance– funding that would be crucial for infrastructure maintenance and capital expenditures. Transnet’s Global Medium Term Note programme had not been updated for over a decade. As part of the update process the programme listing was moved and it is now one of the few corporate programmes listed on the London Stock Exchange’s International Securities Market. Executing the transaction was complex, as Transnet faced numerous challenges along the way. One ambition for Transnet was not just about finding a source of funding, but also about accessing the pool of USD-denominated funding. The transition to targeting a US investor base after a decade presented a number of challenges. Freshfields had to navigate intricate accounting rules, meet US investor expectations, and be ready for a limited market window.

Opportunity amidst huge challenges

Between 2017 and 2021, Transnet faced several domestic and geopolitical challenges that led to interruptions in its bond issuance efforts. However, with the introduction of a new management team at Transnet, a fresh opportunity arose for the company to access the market. Transnet had procured bilateral credit facilities from various finance providers in the hiatus. The plan was to consolidate and refinance some of that external debt under more market-standard terms.

As work on the bond issuance progressed into 2022, a geopolitical storm brewed. The Russian invasion of Ukraine cast an enormous shadow over global financial markets as investors hurriedly moved towards safer bets, initiating a ‘risk-off’ phase. As global demand for coal switched from Russia to Africa, infrastructure investment to help increase throughput capacity was needed more than ever.

Compounding these challenges, a series of adverse events struck South Africa, such as KwaZulu-Natal flooding in May 2022, labour unrest, and cable thefts. Meanwhile, Transnet edged closer to the maturity date of significant debt in July 2022. It became evident that securing a bond in July under the prevailing market conditions was unlikely.

A Freshfields team, led by Partner Gabriel Mpubani, worked on a ZAR12.6bn bridge-to-bond facility with some of the bond underwriters. This innovative facility provided Transnet with a crucial lifeline. It allowed them to manage the repayment of the majority of existing loans due in July, and, crucially, it was structured in a way to incentivise both the underwriters and Transnet to secure a bond within 12 months.

Navigating a ‘risk-on’ window

With the bridge facility in place, the focus turned once again to executing the bond issuance. With the clock ticking, and geopolitical and macroeconomic uncertainty still looming large, an opportunity emerged in late January 2023 – a brief ‘risk-on’ window in the capital markets.

Freshfields documented and prepared the bond for listing on the International Securities Market of the London Stock Exchange. Transnet successfully raised US$1bn for five-year notes at a coupon of 8.25 per cent.

Freshfields’ deep understanding of both conventional deals and the unique context of a South African state-owned enterprise was invaluable in finding effective solutions for stakeholders.