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Fitch Places Telecom Namibia on Rating Watch Negative

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Fitch Ratings has placed Telecom Namibia's long termdebt ratings (IDR) on Rating Watch Negative (RWN).

The RWN reflects deterioration in Telecom Namibia's (TN's) financial profile and its weak liquidity position. TN faces a liquidity cliff, including a bond maturity of NAD200m due in August 2015. Repayment of the bond, along with funding for its ongoing operations, is in Fitch's view dependent on a capital injection from the government. Fitch applies its parent subsidiary linkage criteria to TN's ratings, which are notched down two levels from the government of Namibia's Long-term local currency IDR of 'BBB'.

Government Support

The government of Namibia, through Namibia Post and Telecom Holdings Limited (NPTH 100% owned entity), has pledged NAD400m equity injection into TN. Of this NAD176m was received as of end-June 2015 and a further instalment is scheduled to be made ahead of the August bond maturity. This, along with previous indications of support, suggests tangible government support for TN and currently underpins its ratings.

The 'BB+'/'A-(zaf)' ratings assume the imminent receipt of the final tranche of the NAD400m equity injection in August 2015 and the government's willingness to provide or contribute to further funding given Fitch's forecasts that TN is likely to remain free cash flow (FCF)-negative over the next two years.

Standalone Rating

Fitch views the standalone profile of TN (without government support) at 'CC'. Investments in mobile network and the related high execution risk in rolling out this business have increased the overall group's liquidity risk. TN faces refinancing risk in its short-term debt unless those facilities are extended.

Funds from operations (FFO) deteriorated to NAD1m in 2014 from NAD151m in 2013, increasing TN's adjusted net leverage to 10.1x from 5.4x. FFO fixed charge coverage fell to 1.0x from 3.5x during the same period. The erosion of TN's cash flow generation is set to continue into the rest of 2015 and potentially into 2016, given declines in the company's fixed- voice revenue and lower-than-expected growth from mobile.

Resolution of RWN

Fitch is due to meet with TN management in the next month. The resolution of the RWN will depend on Fitch gaining an understanding of management's plans to address the operational weakness within the business while materially improving the company's liquidity. This is likely to include an insight of the government's willingness to inject further funding beyond the currently proposed NAD400m and how external funding is expected to be structured.

Given the current standalone profile of the business evidence of a material weakening in government support is likely to result in a multi-notch downgrade of the ratings.

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