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Fitch Affirms Helios Towers Nigeria at 'B'; Outlook Stable
July 10, 2015 / 8:55 AM / 2 years ago

Fitch Affirms Helios Towers Nigeria at 'B'; Outlook Stable

(The following statement was released by the rating agency) LONDON/MOSCOW, July 10 (Fitch) Fitch Ratings has affirmed telecom infrastructure group Helios Towers Nigeria Limited's (HTN) Long-term Issuer Default Rating (IDR) at 'B' with a Stable Outlook. A full list of rating actions is available at the end of this commentary. HTN's rating reflects the political and macroeconomic uncertainty of the Nigerian market (Nigeria, rated 'BB-'/Negative) as well as the company's revenue visibility and strong growth prospects. HTN has managed to contain the impact of the recent weakness of the Nigerian naira (NGN) on its financial performance. Underlying EBITDA in USD is growing due to strong underlying demand, operational efficiency gains and the falling cost of diesel. HTN's market position has changed as competing tower companies in Nigeria have grown significantly by acquisition. Short-term prospects are unlikely to be diminished but HTN is going to be a fairly smaller player in a more fragmented market where competitive intensity may weigh on growth and profitability. KEY RATING DRIVERS Strong Growth Potential HTN is the second-largest independent telecommunications tower operator in Nigeria with a portfolio of 1,202 towers at end-December 2014. Fitch expects HTN to continue growing strongly in line with the telecommunications market in Nigeria, which is seeing rapidly increasing demand for mobile and broadband. HTN is realising economies of scale and improving its free cash flow (FCF) and leverage profile by activating its dormant towers and increasing its tenant base and the number of co-locations per tower. Management's focus on improving operating efficiency also contributed to significant EBITDA margin expansion in 2014. Revenue Visibility HTN benefits from a visible revenue stream driven by long-term lease agreements, which comprise embedded contractual escalators and, in some cases, cost pass-through mechanisms. Following the shift from CDMA to GSM operators, over 75% of revenues are derived from three major GSM players, MTN, Etisalat, and Airtel, which are all backed by investment-grade parents. As at end-December 2014, the average remaining life of all tenancy agreements was 4.7 years, and HTN had total contracted revenues of USD299m. Changes to Competitive Environment HTN's market position is protected by high barriers to entry, switching costs, and quality of service. However, an agreement between Airtel and American Tower Corporation for the sale of Airtel's towers in Nigeria will lead to the introduction of a fourth independent tower operator. Also, competing tower operator IHS has agreed to purchase around 11,000 towers from Etisalat and MTN. HTN is thus set to become a fairly smaller player in a more fragmented market, which may dampen growth prospects in the medium-term. FX Headwinds HTN currently has around 51% of its revenues denominated in USD, with the remaining 49% denominated in NGN. The devaluation of the NGN relative to the USD reduced revenue growth in 2014 and 1Q15. HTN is also exposed to a FX mismatch as all its debt is in USD. However, HTN plans to renegotiate its contracts to increase the percentage of revenue in USD to around 90%. Also, operating costs are mostly in local currency except for diesel, with changes in the price of diesel partially passed on to customers (in 2014, half of contracts by revenue had power indexation clauses). Hence the impact of FX volatility on EBITDA has been more limited. If HTN is successful in re-denominating its main contracts in USD, an appreciation of the NGN relative to the USD would have a negative impact on EBITDA. High Leverage to Decrease Funds from operations (FFO) adjusted net leverage at end-2014 was higher than expected due to costs related to HTN's debt refinancing and the negative FX impact on cashflow generation. FCF should improve significantly in 2015 as EBITDA continues to grow and as capex falls with the completion of hybrid power system upgrades. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for HTN include: -Renewal of key lease contracts with Airtel and MTN -Revenue growth of mid-single digit percentages over the medium-term, but lower in 2015 due to negative FX trends. -EBITDA margin around 52%-53% over the medium-term (45% in 2014) -Capex-to-sales ratio declining to 11% in 2017 (17% in 2014) -No dividends to shareholders RATING SENSITIVITIES Future developments that may, individually or collectively, lead to positive rating action include: - FFO-adjusted net leverage below 4.0x on a sustained basis (2014: 6.6x) -FFO fixed charge cover greater than 2.5x (2014: 1.6x) -Sustained significant improvement in FCF generation -Sustained strong market position as the Nigerian towers market develops Future developments that may, individually or collectively, lead to negative rating action include: -Failure to reduce FFO adjusted net leverage, on a sustained basis, to 5.0x by end-2017 -Failure to improve FFO fixed charge cover to 2.0x, on a sustained basis, by end-2017 -Continued weak FCF due to limited EBITDA growth, higher capex and shareholder distributions, or adverse changes to HTN's regulatory or competitive environment LIQUIDITY HTN has a reasonable liquidity position. It ended March 2015 with cash of USD11.9m, and USD20m of undrawn committed credit facilities. The company's only existing debt is the USD250m bond which matures in July 2019. HTN's FCF generation was weak in 2014 but should improve in 2015. FULL LIST OF RATING ACTIONS Helios Towers Nigeria Limited Long-term IDR: affirmed at 'B'; Outlook Stable Senior unsecured rating: affirmed at 'B'/'RR4' National Long-term rating: affirmed at 'A-(nga)'; Outlook Stable Helios Towers Finance Netherlands B.V. Senior unsecured notes guaranteed by Helios Towers Nigeria Limited and Tower Infrastructure Company Limited: affirmed at 'B'/'RR4' Contact: Principal Analyst Jonathan Levy Analyst +44 20 3530 1701 Supervisory Analyst Damien Chew, CFA Senior Director +44 20 3530 1424 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014) here Additional Disclosures <a href=" cfm?pr_id=987710">Dodd-Frank Rating Information Disclosure Form Solicitation Status here <a href=" =2&detail=31">Endorsement Policy 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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