(The following statement was released by the rating agency)
Dec 04 -
-- We think the continued decline in fixed line and losses in mobile will
result in further profit erosion for South African telecommunications provider
Telkom S.A. Ltd. (Telkom).
-- In addition, sustained network investment could result in very weak
free cash flow generation.
-- We are lowering our long-term rating on Telkom to 'BBB-' from 'BBB'.
-- The stable outlook reflects our expectations of a low- to
mid-single-digit decline in sales from Telkom's core fixed-line business,
gradual reduction of mobile operating losses, and maintenance of a solid
capital structure over the next two years.
On Dec. 4, 2012, Standard & Poor's Ratings Services lowered its long-term
corporate credit rating on South African telecommunications provider Telkom
S.A. Ltd. (Telkom) to 'BBB-' from 'BBB'. The outlook is stable.
The downgrade reflects our expectations of Telkom's gradual and sustained
weakening of operating performance. We believe that the likely steady revenue
growth from its fixed-broadband and mobile services are unlikely to offset,
over the next two years, the sharp downward trend in its core fixed-line voice
revenues. We base our view on the ongoing fixed-to-mobile substitution trend
and rising pricing pressures from mounting competition, as well as a likely
reduction in leased line revenues resulting from mobile operators' increasing
The downward trend in highly profitable fixed-line voice traffic, its high
fixed-cost base and operating losses for mobile operations will likely further
affect Telkom's profitability over the next two years. This, combined with a
projected surge in capital expenditures, could result in sustained very weak
free cash flow generation.
Overall, we project a low-single-digit total group revenue decline for Telkom
in the fiscal years ending March 31, 2013, and March 31, 2014, and a further
deterioration of its EBITDA margin to the 21%-23% range over the same
period--a relatively weak level compared with peers--from 25% in the fiscal
year ended March 31, 2012, and 27% in fiscal year ended March 31, 2011.
We continue to assess Telkom's business risk profile and governance and
management as "fair" under our criteria.
Our assessment of Telkom's financial risk profile remains "modest" however,
reflecting its robust operating cash flow generation and solid capital
structure. Standard & Poor's-adjusted gross debt-to-EBITDA ratio was a
moderate 1.3x on Sept. 30, 2012, which continues to support the ratings.
In our view, numerous changes in Telkom's top management and board in recent
years may have delayed the implementation and execution of its strategic
priorities, notably the buildout of its mobile operations and the material
upgrade of fixed infrastructure.
We anticipate, however, that there will be a surge in capital expenditures
between 2013 and 2015--potentially in excess of 20% of sales--as necessary to
fund its network investment plans. Management indicated that capital
expenditures could reach South African rand (ZAR)18 billion-ZAR21 billion over
The higher capital expenditures are likely to depress Telkom's generation of
free operating cash flow (FOCF), which may turn slightly negative over that
period in our view. Nevertheless, in our baseline scenario, we do not project
an increase of adjusted leverage above 1.5x, a level commensurate with our
revised rating expectations.
The ratings on Telkom primarily reflect its strong leadership position in the
country's fixed-line telecoms market, good growth prospects in the broadband
market, our opinion of the company's robust operating cash flow generation,
and its maintenance of a prudent financial policy.
The ratings are constrained, however, by the structural decline in Telkom's
fixed-line voice traffic, ongoing access line losses, its high fixed-cost
base, material risks associated with the future performance of the company's
mobile telephony business, and increasing competition.
We assess Telkom's liquidity as "adequate," according to our criteria, based
on the following elements as of Sept. 30, 2012:
-- ZAR564 million of cash on hand,
-- About ZAR4.3 billion of liquid short-term investments,
-- Roughly ZAR4.0 billion of undrawn committed credit facilities.
This, combined with Telkom's ZAR10 billion domestic medium-term note program,
altogether provide Telkom with sound financial flexibility to cover:
-- An expected rise in network investments stemming from the mobile
network rollout and the launch of a multi-year material upgrade of the fixed
-- Short-term debt of ZAR1.4 billion, mostly consisting of commercial
-- Our anticipation of the resumption of a modest dividend distribution
beyond 2013, after the suspension of all shareholder returns for fiscal 2013.
Overall, we estimate Telkom's coverage of liquidity uses by available
liquidity sources to be in excess of 1.5x for the 12 months to end-September
The next major debt maturity consists of the ZAR4.1 billion syndicated credit
facilities, of which ZAR2.0 billion was drawn on Sept. 30, 2012. This facility
is due in December 2013. We expect the company to proactively work on
lengthening its debt maturity profile in the coming months. We also expect the
company to continue to limit its overall exposure to foreign currency debt.
Some of Telkom's debt outstanding--including the ZAR2.5 billion bond issue
(TL20)--carries financial maintenance covenants. For example, the company must
maintain a leverage ratio (that the terms of the documentation define as net
interest-bearing debt to the past 12 months of EBITDA) of not more than 3.0x
and an interest coverage ratio (net of finance charges to the last 12 months
of EBITDA) of not less than 3.5x. Furthermore, the syndicated credit
facilities include a rating trigger that gives lenders the possibility to
require repayment of amounts outstanding if the rating on Telkom falls to the
The stable outlook reflects our expectations of a low- to mid-single-digit
decline in sales from Telkom's core fixed-line business, gradual reduction of
mobile operating losses, and the maintenance of a solid capital structure and
conservative financial policy over the next two years.
The planned surge in capital expenditures stands to depress Telkom's
generation of free cash flow, which could be negative over 2013-2015.
Nevertheless, we expect the group to preserve robust credit measures, with
adjusted ratios of gross debt to EBITDA below 2.0x and FFO to debt at or above
45%, levels commensurate with the 'BBB-' rating.
Although unlikely in the next two years, we could further lower the ratings on
Telkom in the event of a more significant weakening in the company's business
risk profile than we currently anticipate, its inability to sustain positive
FOCF over the medium term, or a durable decline in credit measures to levels
not commensurate with the current rating.
We believe that ratings upside is unlikely in the next two years, given the
continued strain on the fixed-line business, and uncertainties concerning
Telkom's future business performance in domestic mobile activities.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Key Credit Factors: Business And Financial Risks In The Global
Telecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009
-- The Largest Operators Have The Most To Lose In Europe's Telecom
Market, Nov. 7, 2012
Downgraded; CreditWatch/Outlook Action
Telkom S.A. Ltd.
Corporate Credit Rating BBB-/Stable/-- BBB/Negative/--
Senior Unsecured BBB- BBB