June 4, 2013 / 1:31 PM / 4 years ago

Fitch Downgrades MTN Group Limited to 'AA-(zaf)'; Outlook Stable

(The following statement was released by the rating agency) JOHANNESBURG/LONDON, June 04 (Fitch) Fitch Ratings has downgraded MTN Group Limited's (MTN) National Long-Term Rating to 'AA-(zaf)' from 'AA(zaf)'. The Outlook is Stable. Fitch has affirmed the National Short-Term Rating at 'F1+(zaf)'. Simultaneously, Fitch has affirmed MTN Holdings (Pty) Ltd's senior unsecured debt rating at 'AA-(zaf)'. The downgrade reflects the group's heightened business risk profile as a result of its growing reliance on cash generated from weak non-investment grade countries. The Stable Outlook reflects the group's on-going strong cash generation and conservative leverage metrics. KEY RATING DRIVERS: Adequate Financial Flexibility: Fitch expects MTN's fund from operations (FFO) lease-adjusted leverage to trend at or below 1.5x over the short to medium term. In addition, we also project pre-dividend free cash flow to sales to improve following two years of network investment in Nigeria and trending higher than 8%over the short to medium term. This provides MTN with an adequate level of financial flexibility to enable the group to spend on network quality and coverage and thus retain its all-important leading market shares. Country Risk: MTN's business risk profile is heightened through its operational exposure to non-investment grade countries. In particular the group's largest contributor of cash flow is Nigeria ('BB-'/Stable), which comprises 38% of consolidated EBITDA. While such countries typically have good mobile prospects given low mobile penetration rates and non-existent fixed line infrastructure, the operations are susceptible to political instability and unpredictable regulatory authorities. South African Markets Maturing: With mobile penetration rates in South Africa now well in excess of 100% in addition to intensifying competition, the slowdown in the group's South African operations will place increasing reliance on cash flow growth from non-South African operations to service debt at the Holding Company (HoldCo) level. Fitch expect some in-market consolidation to occur in markets such as South Africa, but also across the continent, over the next three years. However, given the uncertain timing, we will treat this M&A risk on an event basis. Structural Subordination: Fitch accepts that borrowing locally in African markets not only provides a currency hedge against locally generated cash flow, but also makes strategic sense from a group funding perspective. However, Fitch highlights that with respect to the bondholders of MTN's South African debt, the cash flows from the group's non-South African operations are structurally subordinated given that MTN raises its funding on a non-recourse basis to HoldCo (MTN recently raised an additional USD1.8bn in debt facilities on a non-recourse basis to fund capex in Nigeria). However, we take comfort from the fact that MTN has historically been successful in circulating cash to the Holdco. Currently the ratio of HoldCo gross debt to available upstreamed cash is much more conservative than the consolidated leverage metric but this ratio may deteriorate with further issuance of holding company debt. RATING SENSITIVITIES Negative: Future developments that could lead to negative rating actions include: FFO lease-adjusted leverage sustained above 1.5x. Pre-dividend free cash flow falling below 8% on a sustained basis Positive: Future developments that could lead to positive rating action include: A tighter group financial policy Contact: Primary Analyst Darshak Juta Associate Director +27 11 290 9407 Fitch Ratings Southern Africa (Pty) Ltd 23 Impala Road Chislehurston Sandton, 2196 Secondary Analyst Michael Dunning Managing Director +44 20 3530 1178 Committee Chairperson Damien Chew Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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