Fitch Downgrades Telecom Namibia on Weakening State Support
Published on: 14th Aug 2014
Fitch Ratings has downgraded Telecom Namibia's (TN) Long term local currency debt rating to 'BB ' from 'BBB ' and its National Long term rating to 'A (zaf)' from 'A(zaf)'.
The Outlooks are Negative.
Fitch said that the downgrade reflects its view that state support for TN has weakened. TN's standalone credit profile has deteriorated with no significant evidence of government support. They also note that so far this year TN has not requested additional government support.
The erosion of TN's cash flow generation looks to continue into the rest of 2014 given a decline in fixed-line revenue and high capital expenditure. The downgrade now reflects a two-notch differential of TN's ratings with those of the Namibian sovereign's local currency IDR of 'BBB'/Stable.
TN has legal, operational and strategic links with the state of Namibia, which has secured some of TN's debt in the past and provided financial guarantees. Further deterioration without tangible signs of support from the government may result in a further widening of the difference between the ratings of TN and the Namibian government, reflecting more imminent liquidity risks.
Under Fitch's parent and subsidiary rating linkage methodology and in line with other Fitch rated state-owned Namibian entities, TN is rated on a top-down basis from the rating of its 100% shareholder, the Namibian government. Given the deterioration in TN's financial profile and the absence of additional government support, Fitch has widened the gap between the parent and TN by a further notch. TN has strong operational and strategic links with the Namibian government; however, the legal links are limited. These include strategic telecoms ownership links with West African Cable System's sub-sea cable landing rights and usage as well as providing important network links to local government departments, schools and hospitals.
Further deterioration in TN's financial and operational profile without tangible government assistance materialising to improve the company's credit profile could cause us to re-assess the way we factor in government support. We could move to a bottom-up approach under Fitch's parent and subsidiary rating linkage methodology. TN's rating on a standalone basis is likely to be in the 'B' category.
High Leverage to Persist
TN's funds flow from operations (FFO)-adjusted net leverage increased to 5.1x FYE13 from 2.5x at FYE12. Following continued declines in EBITDA margin to 17% in FYE13 from 25% in FYE12, Fitch expects leverage to increase in 2014, and the company to slowly de-leverage from 2015 onwards. The pace of de-leveraging will depend on TN's ability to successfully implement its fixed mobile convergence (FMC) strategy and capture significant mobile revenue market share.
Mobile Network Roll-Out Delayed
TN's mobile network rollout has been delayed by approximately nine months with severe revenue implications. So far, 190 base stations have been deployed compared with a planned target of 253 by September 2014. As a result, TN has lower mobile coverage and data capacity than expected, limiting subscriber take-up and revenue growth. A new billing and customer service support system installed in November 2013 has been affected by technical problems, contributing to delays in the implementation of the FMC strategy. This new IT system was meant to allow TN to offer mobile customers real-time billing and also to provide customers with a single bill for their fixed and mobile services.
Negative FCF to Continue
TN had negative free cash flow (FCF) of NAD223m in FY13. FCF is expected to remain negative for the next two years as capex remains high to support the mobile network deployment and the fixed network fibre upgrade. TN last year faced declining fixed-line revenue, which was 35% of total revenue, compared with 42% at FYE12. TN has the monopoly over fixed-line services in Namibia but cashflow from the fixed-line business has not been sufficient to fund increased capex requirements.
Competition Set To Increase
With TN's plans to offer both fixed and mobile services in Namibia, the market is set to become significantly more competitive. MTC, the 64% government-owned mobile player with almost 96% of current mobile subscribers, is also rolling out fixed-line infrastructure to compete with bundled offerings. TN's plan to build on its strong fixed-line position by offering FMC services has strategic merit, but is not without significant execution risk. The presence of two state-owned telecoms players further complicates the domestic competitive landscape. The prospect for price discounting and lower margins is a distinct possibility and potentially damaging to both entities.
Disposal of Foreign Companies
TN has sold its shareholding in Mundo Startel and expects to receive NAD20m (USD2m) before FYE14. Vodacom's planned acquisition of Neotel should allow TN to dispose of its shareholding in Neotel for ZAR180m before FYE15. Management plans to use these proceeds for part payment of a bond maturing in 2015.
Leverage and Liquidity Key
Fitch believes that the large up-front investment required to deploy a mobile network, as well as continuing with its fibre-to-the-cabinet fixed network upgrade, will increase TN's leverage. If revenue growth from the planned investment is slower than expected or the market more competitive, TN's leverage could increase sharply while eroding cash flow generation could hamper its ability to refinance its upcoming 2015 bond maturity.
Liquidity is expected to be weak due to negative FCF, maturing debt in 2014 and 2015 and high capex. TN had NAD61m of cash as of FYE13 (FYE12: NAD22m). This compares with NAD429m of short-term debt and Fitch's expectation of negative FCF of around NAD180m for 2014. Management expects to meet the liquidity requirements and planned capital expenditure with new loans in 2014 and refinancing of maturing bonds in 2015 with new bonds.