Moody's: MTN's Credit Profile Supported by Market Positions Across Africa
Published on: 14th May 2014
By: Ian Mansfield
Moody's Investors Service has issued a report that says that both South Africa's MTN Group and India's Bharti Airtel maintain credit profiles that are supported by dominant positions in their respective home markets of South Africa and India mitigating potential volatility from their other African operations.
While the two telecom operators share many similarities such as scale and exposure to Africa, there are key differences that contribute to the one-notch rating differential between the two companies.
"MTN holds leading and dominant market positions in many African markets by subscriber numbers, benefiting from a first-mover advantage, while Bharti is the second or third largest operator in the rest of the African continent," says Dion Bate, a Moody's Vice President - Senior Analyst and co-author of the report. However, Bharti faces less exposure to African emerging market cash flows than MTN, as India remains the predominant cash flow driver for Bharti.
"MTN faces higher emerging market risks as a larger percentage of its cash flows comes from either non-rated or non-investment grade countries whereas Bharti's cash flow stream is largely investment grade," says Mr Bate. However, MTN receives sizable dividends and management fees that are up-streamed from markets outside of South Africa, which improves its debt servicing ability at the holding company level.
MTN has historically followed the traditional approach of taking ownership of its infrastructure, but has recently moved to monetize its passive infrastructure like Bharti. Bharti employs an asset-light business model that seeks to optimize operational efficiencies. It outsources non-strategic assets, such as cellular towers, submarine cables and network infrastructure, so resources can be used to expand its 3G, 4G and data services.
While both companies have comparable EBITDA margins in their home markets, MTN's EBITDA margins in other African countries are markedly higher than Bharti's owing to its leading market position and first-mover advantage. Bharti offers low-priced services in Africa to gain market share which leads to lower profitability and is reflected in the company's profit margins.
"MTN's lower leverage of below 1.0x over the past 5 years provides headroom for debt funded acquisitions and network expansion," adds Mr Bate. Bharti's leverage is significantly higher due to its acquisition of Zain's sub-Saharan African assets in 2010, with adjusted debt/EBITDA at 2.9x for the year ended March 2014.
MTN's debt profile is managed on a decentralized basis with the majority of its operations managing their own funding requirements. This results in structural subordination with local lenders having first claim over the cash flows and assets of the subsidiaries, which is incorporated in MTN's final rating. On the other hand, Bharti operates on a centralized treasury basis with almost all its debt issued under its guarantee. As such, all debt ranks pari passu with no subordination.
MTN manages its exposure to foreign currency volatility by matching local currency debt obligations with respective cash flows. Bharti on the other hand has over 65% of its debt denominated in USD, which exposes it to substantial foreign exchange risk. However, the Indian company has been proactively managing its foreign exchange risks and has safeguards in place to minimize the impact of rupee depreciation.