Moody’s Investors Service (“Moody’s”), today assigned a Baa3 rating to the $1 billion long-term guaranteed unsecured notes issued by MTN (Mauritius) Investments Limited. The notes are irrevocably and unconditionally guaranteed by its 100% parent company, MTN Group Limited (“MTN”), Mobile Telephone Networks Holdings Limited, MTN International (Mauritius) Limited and MTN International Proprietary Limited and Mobile Telephone Networks Proprietary Limited. The rating outlook is negative.
“Proceeds from the bond issuance will initially be used to redeem existing revolving credit facilities which will strengthen MTN’s liquidity profile, to help fund MTN South Africa’s planned capital expenditures over the next 12 months and take advantage of potential growth opportunities that may arise,” says Dion Bate, a Moody’s Vice President — Senior Analyst and local market analyst for MTN.
The $500 million and $500 million notes due 2022 and 2026, respectively are unsecured obligations and will rank pari-passu with all other existing and future unsecured and unsubordinated debt obligations of MTN Group Limited, including amongst others, the Group’s $750 million bond due 2024 and its $1 billion revolving credit facility (RCF) due 2019 (unrated). The notes benefit from irrevocable and unconditional guarantees from material subsidiaries, which includes MTN’s holding company, MTN Group Limited.
Moody’s expects the impact on MTN’s consolidated leverage to be limited given the proceeds will initially be used to redeem the fully drawn $1 billion RCF. However, as MTN rolls out is proposed ZAR11.2 billion capex plans in South Africa over the next 12 months, we anticipate gross debt levels to increase resulting in consolidated leverage to increase from 1.9x (as of 30 June 2016) to around 2.2x. This assumes no repatriation of dividends from Nigeria and Iran to MTN and does not factor any funding requirements for the purchase of additional spectrum in South Africa, both of which could affect MTN debt levels and leverage trajectory.
MTN’s global scale issuer rating of Baa3 and national scale issuer rating of Aa3.za reflect the company’s strong brand and position as the number two operator in the maturing South African (Baa2 negative) market (which contributes approximately 26% of revenues and 21% of EBITDA) as well as its leading market position in most of the 22 countries in which it operates, including Nigeria (B1 stable) (which contributes around 36% of revenues and around 47% of Group EBITDA). The ratings are further supported by the Group’s overall moderate credit metrics in terms of adjusted EBITDA margin of 46%, leverage of 1.9x (defined as gross debt to EBITDA and per Moody’s standard adjustments) and interest coverage of 5.1x ((FFO + Interest Expense) / Interest Expense) as well as positive net subscriber growth driven by low/medium wireless penetration levels in most of its markets.
The ratings remain primarily constrained by (1) the risks, including political and regulatory, associated with the less mature and/or unpredictable nature of MTN’s markets outside South Africa; (2) its high operating and cash flow exposure to Nigeria; and (3) the challenges posed to the ability of the Group to up-stream dividends and management fees over the long term, as experienced from its operations in Iran (unrated), Syria (unrated), Sudan (unrated) and more recently Nigeria.
MTN’s liquidity profile weakened over the past six months to 30 June 2016 as a result of no dividends being up-streamed from MTN Nigeria (FY2014 represented around 48% of dividends and management fees from operating subsidiaries), as well as funding requirements from MTN South Africa and dividend payments to equity shareholders. Over the past three months and following the resolution of the Nigerian fine, MTN has actively worked at strengthening its liquidity position through the issuance of new banking facilities and through the recent $1 billion bond issuance, which will be used to redeem drawn RCF’s and increase the headroom under its current facilities. Post 30 June 2016, MTN has secured bank funding of around ZAR25.2 billion and has increased its available facilities from ZAR250 million to ZAR10.6 billion. The $1 billion bond issuance will lengthen MTN’s maturity profile and further improve MTN’s liquidity position.
Moody’s expects that MTN will proactively seek to maintain a strong liquidity profile, with adequate headroom under its facilities and address any approaching debt maturities in advance.
The negative outlook captures the repatriation challenges faced by MTN Nigeria and Irancell, resulting in MTN being more reliant on cash flows outside its key markets and on debt to fund its higher capital expenditure in South Africa.
The outlook could be changed to stable if MTN is able to demonstrate stable cash flows through the continuous up-streaming of dividends and management fees from its operating subsidiaries, including Nigeria; and credit metrics stabilize.
WHAT COULD CHANGE THE RATING UP/DOWN
Developments that would most likely have negative rating implications would be (1) a weak liquidity profile at the holding level; (2) lower than expected up-streaming of dividends / cash flows from MTN’s non-South African operations which might result in higher leverage and weaker liquidity developing over time at the MTN holdings level; (3) a further weakening of the sovereign credit profiles in the key markets (such as South Africa (Baa2 negative), Nigeria (B1 stable), Iran (unrated) and Ghana (B3 stable)); (4) a failure to maintain a balanced debt profile at the MTN Group level in line with current expectations; (5) a sustained loss of market share or material declines in operating margins in its key markets; or (6) event risk associated with a material acquisition or other corporate activity that negatively impacts the company’s existing or targeted leverage ratios.
Quantitatively, downward pressure would arise if MTN’s consolidated EBITDA margin was sustained below 40% and/or total debt to EBITDA on a consolidated basis or in MTN Nigeria or MTN South Africa or MTN holdings level were to rise sustainably above 3.0x.
In the absence of improving credit profiles within the major markets in which MTN operates (such as South Africa, Nigeria, Iran and Ghana), MTN’s rating is unlikely to be upgraded to Baa2, particularly given our expectation of stronger growth opportunities in markets outside South Africa.
MTN Group Limited, based in South Africa, is the largest African-based mobile telecommunications operator in terms of subscriber base and revenues. Operating since 1994, MTN has leading market positions (No. 1 or 2) in 22 African and Middle Eastern countries with a total subscriber base of 232 million, as of 30 June 2016. Its key markets, South Africa (Baa2 negative) and Nigeria (B1 stable), combined contribute 68% to consolidated EBITDA.
Please see latest Credit Opinion and associated research for further information. Moody’s last rating action was 20 June 2016 when Moody’s affirmed the Baa3 and Aa3.za issuer ratings and left the outlook on negative.
The principal methodology used in this rating was Global Telecommunications Industry published in December 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The Local Market analyst for this rating is Dion Bate, 27-11-217-5472.
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