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S&P warns on Cell C debt

Nicola Mawson
By Nicola Mawson, Contributor.
Johannesburg, 01 Jun 2015
Cell C says it enjoys strong financial support from its parent company, Oger Telecom.
Cell C says it enjoys strong financial support from its parent company, Oger Telecom.

Standard & Poor's (S&P) has put Cell C on credit watch, warning it may be downgraded unless it refinances about R2 billion in debt.

The international rating agency notes Cell C's unsecured debt is shortly set to mature, yet it continues to generate negative free cash flow. It says, despite Cell C's strong track record of securing external funding, it believes "currently funded sources of liquidity do not cover the maturity".

S&P currently has Cell C rated as B-, which is at the bottom end of junk status and a further review downwards would make the company a substantially risky investment. Oger Telecom, which owns 75% of Cell C, has invested $450 million (about R5.2 billion) in the business over the past 24 months.

Cell C, which will spend R2.2 billion on its network this year, says it has a strong track record in servicing its financings and "enjoys the full commitment of Oger Telecom to support Cell C with its financial requirements".

The operator, SA's third-largest, says it is "well on track to execute its plans to service the maturing bonds. On completion, Cell C fully expects S&P to resolve this credit watch given its technical nature."

However, Oger Telecom is looking at the possibility of selling its majority stake in Cell C because of the most recent termination rate cuts, which do not favour Cell C as much as initially expected, Reuters reported in March.

S&P says it has placed Cell C on credit watch because, in the absence of long-term funding, the operator's liquidity will remain weak and it needs to obtain funding in the next month to meet its debt obligations. It concedes, however, that Cell C has a successful track record of financing its capital-spending programme and debt maturities with external funding and support from its parent, Oger.

Cell C's business risk profile is primarily constrained by its relatively weak market position as the third operator in South Africa's mature four-player mobile telephony market, says S&P. "We acknowledge Cell C's established brand, improving network quality, and customer growth. Still, leading competitors MTN and Vodacom Group continue to hold dominant positions, while Cell C and number four player Telkom Mobile attempt to achieve scale and profitability."

S&P also forecasts increasing revenue growth over the next three years as Cell C garners more prepaid customers thanks to its competitive pricing strategy and support from asymmetric mobile termination rates, says S&P. Cell C's revenue gained 16% in the year to March.

"Although we see potential for Cell C's investments to result in meaningful revenue growth, the improvement in profitability required to achieve breakeven within the next three years may be challenging and relies on better prices for telecoms services, in our opinion."

S&P notes, if Cell C obtains additional funding sources, it should be able to continue to expand its market share and improve margins, although the company will not achieve breakeven before 2017.

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