Transnet breached loan covenants for a second year running as the South African port and rail operator staggers under a debt burden that’s constraining investments needed to resurrect its ailing equipment and infrastructure.

The state-owned company’s loans increased to R138-billion in the year through March, from R130-billion the year before, it said in a presentation to lawmakers Tuesday. Finance costs, at R15.1-billion, were almost equal to capital investment of R16.7-billion — which was less than half of what Transnet spent ten years ago.

The higher debt costs are mostly met by cutting investment budgets that are needed to replace old and worn equipment along with other significant repairs, said Okan Akin, London-based EM credit analyst at AllianceBernstein. “This is the major concern for the whole South African economy, as Transnet’s capacity constraint is the main bottleneck for sustained economic growth,” he said.

Transnet is almost a year into a turnaround strategy that it announced in October 2023 to overhaul its rail and port services and tackle the impact of years of mismanagement, theft and vandalism. Rail inefficiencies cost South Africa’s economy more than 400 billion rand in 2022, according to the National Treasury, while the nation’s minerals council estimates mining exports fell R50-billion short of target.

The rising cost of servicing debt has reduced the measure of cash interest cover — the amount of interest expenses a company can pay from earnings — to below the minimum of 2.5 times required by loan covenants, Transnet said in the presentation. Lenders, who can call in the loans if the level isn’t met, have previously agreed to waive such a breach. The company didn’t immediately respond to emailed questions.

Transnet Chief Executive Officer Michelle Phillips said last month that the company would have to engage with lenders to keep “breathing room” on debt payments and is looking for cheaper funding.

The yield on Transnet’s $1-billion of eurobonds due 2028 has climbed 12 basis points this month to 7.51% on Wednesday, widening the premium over similar-maturity US Treasuries by 48 basis points. Still, Transnet’s yield is down about 150 basis points from a year ago, reflecting investor confidence that the government will backstop the bonds.

South Africa’s Treasury provided Transnet with a 47 billion-rand guarantee facility in December, which will meet its short-term liquidity needs, “hence investors are not too concerned,” Akin said. In the longer term, operations would have to improve for the company to escape its debt trap.

“Clearly, Transnet’s current business model has failed and South Africa needs a completely new way of running its logistics infrastructure,” he said.