South African state-owned transport firm, Transnet, has concluded a R30 billion loan facility agreement with the China Development Bank (CDB).

The loan will be used for the funding of hundreds of locomotives the company is building with China South Rail and China North Rail.

The loan is part of a bilateral memorandum of understanding signed between South Africa’s President Jacob Zuma and his Chinese counterpart, President Xi Jinping. The two heads of state signed a $5 billion MOU in December 2014, cementing bilateral relations between the two BRICS partners.

The proceeds of the loan will be used to fund the company’s 232 diesel and 359 electric locomotives. These locomotives are part of Transnet’s 1 064 locomotives acquisition programme.

Transnet will draw the second tranche of the loan subject to market conditions and funding requirements, based on the projects included in the company’s R337 billion investment programme.

Acting Group Chief Executive, Mr Siyabonga Gama, and Mr Li Gang, CDB’s Vice president, signed the agreement on the sidelines of the World Economic Forum in Cape Town, South Africa. The signing ceremony was attended by Transnet’s shareholder representative Public Enterprises Minister, Ms Lynne Brown.

The repayment term of the loan is fifteen years, with a grace period of four and a half years, while the locomotives are under construction. The deal represents 60% of the over R50 billion required for the 1 064 programme.

Including this agreement, Transnet has now secured 92% of the required funding for the programme.

Transnet says the loan:

• Mitigates liquidity risk and secures the funding on a committed basis – a key consideration for the investment community, especially rating agencies;
• Maintains overall cost of debt within acceptable levels;
• Matches the assets and liabilities profile taking into account the useful life of the locomotives being built,
• Allows Transnet to conserve its use of domestic credit lines;
• Diversifies funding sources
• Gives South Africa effect to its BRICS commitments.

The acquisition of the locomotives is at the heart of Transnet’s Market Demand Strategy aimed at increasing volumes while reducing the average age of the company’s locomotive fleet.

The programme is designed to reinforce Transnet’s plans to grow volumes from the current 210-million tons to over 350-million tons in seven years.

Transnet, which is spending more than R337 billion over the next seven years on revamping its rail, ports and pipelines infrastructure, raises funds on the open markets on the strength of its financial position, without government guarantees. The majority of the infrastructure spend or R210 billion is dedicated to rail.