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Fitch Assigns IHS Netherlands HoldCo 'B+' Final Rating
November 29, 2016 / 6:30 PM / 10 months ago

Fitch Assigns IHS Netherlands HoldCo 'B+' Final Rating

(The following statement was released by the rating agency) LONDON, November 29 (Fitch) Fitch Ratings has assigned IHS Netherlands Holdco B.V. (IHS Netherlands) a final Long-Term Issuer Default Rating (IDR) and senior unsecured rating of 'B+' and a final National Long-Term Rating of 'AA(nga) ', following the successful USD800m bond placement and subsequent refinancing of the group's debt. The Outlooks are Stable. Fitch has also upgraded IHS Towers NG Limited's Long-Term IDR and National Long-term Rating to 'B+' and 'AA(nga)' respectively with Stable Outlooks, as the company is now part of the IHS Netherlands restricted group. We have affirmed the senior unsecured ratings of IHS Towers NG Limited and IHS Towers Netherlands FinCo NG B.V. at 'B'/RR5, a notch lower than the senior unsecured rating of IHS Netherlands. IHS Towers NG Limited and IHS Towers Netherlands FinCo NG B.V.'s ratings have been removed from Rating Watch Positive and simultaneously withdrawn. Fitch has withdrawn the ratings of IHS Towers NG Limited and IHS Towers Netherlands FinCo NG B.V. as these companies are being included in the IHS Netherlands restricted group. Accordingly, Fitch will no longer provide ratings or analytical coverage for IHS Towers NG Limited and IHS Towers Netherlands FinCo NG B.V.. IHS Netherlands' 3Q16 results were in line with our expectations. KEY RATING DRIVERS IHS Netherlands Debt Structure IHS Netherlands has successfully issued a USD800m senior unsecured bond, guaranteed by 100% owned operating subsidiaries, IHS Nigeria Limited (IHSN) and IHS Towers NG Limited. Collectively these companies form the restricted group, owned ultimately by IHS Holding Limited (IHS Group), the mobile telecommunications infrastructure company that operates around 23,000 towers across Africa. IHSN has entered into NGN26.5bn credit facility. IHS Group also has an undrawn USD120m RCF, which is guaranteed by the restricted group. As part of the transaction, almost all existing debt at IHSN and IHS Towers NG Limited has been refinanced, which includes the successful tender offer for IHS Towers NG Limited's 2019 notes. Following the tender offer, USD13m remains outstanding from IHS Towers NG Limited's notes. The restricted group's senior unsecured notes and NGN credit facility rank pari passu with any outstanding IHS Towers NG Limited notes and the guarantee of the IHS Group's RCF. We include the drawn amount of this RCF in the calculation of the restricted group's credit metrics. Impact on IHS Towers NG Limited Following the successful transaction, we have aligned IHS Towers NG Limited's ratings with the restricted group's rating as IHS Towers NG Limited has been incorporated into the operations of the restricted group. However, the outstanding USD13m of notes issued by IHS Towers Netherlands FinCo NG B.V. following the successful tender offer have had their covenants removed. These notes rank pari passu with the restricted group's debt, but they only have recourse to the assets of IHS Towers NG Limited, and not the whole restricted group. These weaker recovery prospects are reflected in an instrument rating that is one notch below that of debt issued by the restricted group. Leading Nigerian Tower Operator IHS group is the leading tower company in Nigeria. Following recent in-country consolidation and tower sales by mobile operators, IHS Group controls just over 50% of all telecoms tower infrastructure in Nigeria. It owns and manages 6,320 towers as of 30 Sep 2016 through the fully owned subsidiaries of the restricted group and just over 9,000 towers through the 49/51 joint venture IHS Group has with MTN. The JV is managed by the restricted group, which has full operational control. The towers represent over 70% of the towers in Nigeria not directly owned by telecoms operators. Even with further consolidation among the other tower owners, IHS Group should still retain its number one position. Glo is the only one of the four main Nigerian mobile operators that has not sold its tower portfolio (around 6,000 towers) to independent tower companies. Strong Underlying Demand The restricted group is well placed to benefit from strong growth potential in Nigerian telecoms. We expect it to continue growing strongly in line with the telecommunications market in Nigeria, which is seeing strong demand for mobile services. With fixed-line population penetration of 0.1% in Nigeria in 2015, 3G and LTE networks are the main way of providing high-speed broadband connectivity. We expect mobile operators to densify their networks to increase capacity as smartphone take up increases and as data traffic grows, resulting in growing demand for passive tower infrastructure over the next five years. The Nigerian telecoms regulator is focused on improving network quality. We believe that the regulator views the shared use of towers as a way of increasing capital efficiency for network operators. Strong Business Model The restricted group's market position is protected by high barriers to entry, switching costs, and the quality of its service. It benefits from a visible revenue stream driven by long-term lease agreements, which comprise embedded contractual escalators to mitigate inflation risk and, in some cases, cost pass-through mechanisms for power costs. The average length of the master agreements the restricted group has with its customers was 7.6 years as of 30 June 2016. We expect significant revenue growth in 2017 from contracted new tower builds, 3G/4G upgrades and as FX rates are reset from 1 January following the naira's devaluation in 2016. This will boost 2017 EBITDA with strong margin expansion, helped by continued energy efficiency gains. We expect free cash flow (FCF) to be negative in 2017 due to significant expansion capex. We forecast FCF will turn positive in 2018 and grow strongly in the following years as capex falls and EBITDA growth continues. Growth More Certain IHSN signed an amendment to its existing contract with MTN Nigeria effective July 2016. In this agreement, MTN committed to provide IHSN with a portion of its intended network rollout of more than 11,200 sites in Nigeria by end-2017. This should result in IHSN gaining around 2,000 new 3G/LTE tenancies and 1,650 new build towers or co-locations by end-2017. This amount of new sites is significant considering that IHSN built 1,648 new sites from 2013 to 2015 and 96 in 1H16. Limited FX Exposure Seventy-eight per cent of the restricted group's revenue as of 30 June 2016 was linked to the US dollar. Payments are made in naira and the US dollar component is converted to naira for settlement at a fixed conversion rate for a stated period. Depending on the contract, the conversion rate is reset after three, six or 12 months. The proportion of revenue linked to the US dollar is set to decline to 72% in 2018, but the company aims to reduce its foreign exchange revenue exposure by moving more contracts to a three-month reset (48% of revenue in 2018 linked to the US dollar with a three-month reset by 2018, compared with 49% in 2016 linked to the US dollar with a 12-month reset). Of the 19% of revenue not linked to the US dollar, roughly half is linked to the naira, with the rest linked to the price of diesel, where volatility is passed on to the customer. A significant part of the company's EBITDA is linked to the US dollar. This is due to most of the company's operating costs being either related to the cost of diesel, where there are some pass through components, or naira-denominated. Capex is paid in naira, with elements linked to the US dollar. Exposure to Diesel Price The restricted group has some exposure to the cost of diesel as not all energy costs are passed on to customers. However, the company is investing in more efficient generators and deploying power management solutions. As of end-Sept 2016, 1,909 sites have been upgraded, where diesel consumption per refurbished site has dropped by more than 50%. We expect overall diesel consumption to fall as power management solutions are deployed to more sites over the next two years. This should mitigate most of any reasonable increase in the cost of diesel. Rating Sovereign Constraint All of the restricted group's assets are based in Nigeria, which means the company is exposed to the risks associated with the Nigerian sovereign (B+/Stable). Even though the restricted group may have an operating and credit profile stronger than the 'B' category, its rating is constrained by the Nigerian Country Ceiling of 'B+'. Changes to the sovereign rating may lead to rating changes for the restricted group. DERIVATION SUMMARY IHS Netherlands HoldCo B.V.'s 'B+' rating is constrained by the country cap associated with its home sovereign Nigeria (B+). IHS Netherlands is well positioned within the Nigerian market as it commands the number one position (out of two operators) with an 72% market share in the largest telecom market in Africa. Underlying demand is strong - with fixed-line population penetration of 0.1% in Nigeria in 2015, 3G and LTE networks are the main way of providing high-speed broadband connectivity. IHS Netherlands is reasonably positioned compared with its investment grade international peers, with strong margins and moderate leverage; EBITDA margin 50% and FFO adjusted net leverage of 3.5x. (vs American Tower 62% and 6.6x, EI Towers 48% and 3.1x.) KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth in USD of over 20% per year in 2017 and 2018, driven by the FX reset in early 2017 and strong underlying growth, assuming no major devaluation of the naira. Growth in 2019 is likely to be in the high single digit percentage range. - EBITDA margin increasing to 60% in 2017 from 51% in 1H16, driven by the FX reset, strong revenue growth and continued cost efficiencies. EBITDA margin should rise slightly in 2018 and 2019. - Capex-to-revenue of over 80% in 2017 as the company invests heavily in medium-term growth opportunities, mainly new build towers and upgrading power management systems. Capex intensity should fall to around 23% in 2018 and decline further in 2019. - No dividends paid in 2017-2019. - The company will need more financing in 2017 to fund capex if it pursues all investment opportunities as FCF is likely to be negative in 2017. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - An upgrade of the Nigerian sovereign rating, together with FFO-adjusted net leverage below 5.0x on a sustained basis, and FFO fixed charge cover greater than 2.5x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Funds from operations (FFO)-adjusted net leverage above 5.5x on a sustained basis (3.5x at end-2015). - FFO fixed charge below 2.0x (2.6x at end-2015). - Weak FCF due to limited EBITDA growth, higher capex and shareholder distributions, or adverse changes to the restricted group's regulatory or competitive environment. - A downgrade of the Nigerian sovereign rating. Rating Sensitivities for the Nigerian sovereign: Future developments that may, individually or collectively, lead to negative rating action include: - A loss of foreign exchange reserves that increases vulnerability to external shocks. - Reversal of key structural reforms and anti-corruption and transparency measures. - Worsening of political and security risks that reduces oil production for a prolonged period or worsens ethnic or sectarian tension. - Failure to narrow the fiscal deficit leading to a marked increase in public debt. Future developments that may, individually or collectively, lead to positive rating action include: - A rise in non-oil revenues that leads to a reduction of the fiscal deficit and the maintenance of a manageable debt burden. - A revival of economic growth supported by the sustained implementation of coherent macroeconomic policies. - Increase in foreign exchange reserves to a level that reduces vulnerability to external shocks. LIQUIDITY Capex Growth Pressures Liquidity On a pro forma basis, the restricted group had USD87m cash at the end of 1H16. Assuming that all existing debt is refinanced as part of the transaction, the company will only have its first debt repayment in 2018. Liquidity is likely to remain limited due to significant capex plans in 2017. The restricted group will need support from IHS Group if the company wants to invest to take advantage of all medium-term growth opportunities. FULL LIST OF RATING ACTIONS IHS Netherlands Holdco B.V. --Long-Term IDR: assigned final rating of 'B+'; Outlook Stable --Senior unsecured rating: assigned final rating of 'B+'/'RR4' --National Long-Term Rating: assigned final rating of 'AA(nga)'; Outlook Stable IHS Towers NG Limited --Long-Term IDR: upgraded to 'B+' from 'B'; Outlook Stable, RWP removed, rating withdrawn --Senior unsecured rating: affirmed at 'B'/RR5; RWP removed, rating withdrawn --National Long-Term Rating: upgraded to 'AA(nga)' from 'A-(nga)'; RWP removed, rating withdrawn IHS Towers Netherlands FinCo NG B.V. --Senior unsecured notes guaranteed by IHS Towers NG Limited and Tower Infrastructure Company Limited: affirmed at 'B'/RR5; RWP removed, rating withdrawn Contact: Principal Analyst Joe Howes Analyst +44 20 3530 1382 Supervisory Analyst Damien Chew 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: peter.fitzpatrick@fitchratings.com. 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