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Local telco ratings hit by SA downgrade

Vodacom is the SA telco highest rated by rating agency S&P.

Vodacom is the SA telco highest rated by rating agency S&P.

The recent downgrade of SA's credit rating to "junk" by both Standard & Poor's (S&P) and Fitch has seen the ratings of local companies, including telecoms operators, tumble in its wake.

The latest hit is MTN, with its outlook downgraded to negative by Fitch yesterday after S&P pushed both MTN and Telkom to negative the day before.

On 3 April, S&P lowered its long-term foreign currency sovereign credit rating on SA to BB+ from BBB- and maintained a negative outlook. On 7 April, Fitch followed suit, downgrading SA's senior unsecured foreign- and local-currency bonds from BBB- to BB+. This after president Jacob Zuma reshuffled his cabinet and fired finance minister Pravin Gordhan.

A credit rating of BB or lower by S&P or Fitch and Ba or below by Moody's is considered non-investment grade, or what some like to call "junk".

S&P and Fitch's ratings both range from AAA to D and are modified by the addition of a plus or minus sign to show relative standing within the categories. From AAA to BBB is considered investment grade; from BB to D is considered speculative grade and each notch down represents increased vulnerability to non-payment of debts, with D representing default.

The sovereign downgrades saw local companies and parastatals come tumbling afterwards, with Eskom, Transnet, Telkom, MTN and five banks being downgraded or having their outlook moved to negative over the last week.

SA telcos rated

The ratings of SA's telecoms operators vary widely, with Vodacom currently maintaining the strongest rating.

Vodacom's most recent rating was in June 2016 when S&P affirmed its zaAAA/zaA-1 long- and short-term SA national scale ratings. At the time, S&P said Vodacom had posted strong 2016 full-year results with increased revenue growth and EBITDA margins, and maintained a satisfactory debt-to-EBITDA ratio.

National scale ratings are not directly comparable to global scale ratings but zaAAA and zaA-1 are the highest possible rating S&P gives for long- and short-term South African ratings.

At the time, S&P said Vodacom's business risk profile was satisfactory and it had a conservative financial risk profile.

"The increased demand for data services by customers, the application of attractive pricing on all services, and Vodacom's cost controls contributed to the group's strong performance, despite the slow economic environment in SA.

"Despite the industry environment, Vodacom has a clear leading position in SA, with a market share of about 45%." S&P said.

So far, Vodacom has not been affected by SA's sovereign downgrades, unlike its peer Telkom. On 10 April, S&P revised its outlook on Telkom from stable to negative but affirmed the telecoms operator's BBB- long-term corporate credit rating, keeping it one notch above junk.

This reflected the ratings agency's view that potentially worsening economic conditions in SA over the next year could affect Telkom's creditworthiness. It warned the negative outlook reflects the possibility of a downgrade over the next year if the rating on SA falls further − indicating weaker market conditions for Telkom.

MTN was the next to follow suit this week, with S&P revising its outlook from stable to negative and affirming its BB+ foreign and local currency long-term corporate credit ratings on the group. It was also warned that a downgrade could be in sight if SA was further downgraded.

In September 2016, MTN's senior unsecured debt was downgraded by S&P to BB+ from BBB- and its national scale rating was lowered to zaA+ from zaAA-. This after Nigeria's long-term rating was dropped to B from B+, with the rating agency saying the sovereign downgrade reflects increased risk for SA-based MTN because Nigeria is its largest market.

Yesterday, Fitch also downgraded MTN's long-term foreign-currency rating to BB+ from BBB- but put the outlook at stable. MTN's national long-term rating was affirmed at AA(zaf) and the outlook revised to stable from negative and the national short-term rating was affirmed at F1+(zaf).

"The weakness in the macro-economic and operating environments of MTN's main operating subsidiaries negatively affect MTN's rating. MTN's rating and outlook is constrained by the South African sovereign rating," Fitch said.

Cell C is in the worst spot after S&P in February downgraded its long-term corporate credit rating to D (default) from SD (selective default) after the mobile network missed an interest payment. S&P said Cell C faced constrained liquidity because of an ongoing delay in concluding a restructuring agreement, and the company has missed interest payments on its senior secured bonds, as well as other unrated debt instruments.

Cell C is also rated by Moody's and was last November downgraded to Caa1 from B3 and its probability of default rating to Caa1-PD/LD from B3-PD. Moody's said the limited default LD designation was due to Cell C's missed principal payments and constitutes a default under Moody's definition.

Moody's ratings range from Aaa to C, with a Caa rating judged to be "speculative of poor standing and subject to very high credit risk".

Moody's said the downgrade reflected increased execution risk Cell C was facing as a result of delays to the proposed recapitalisation. This was causing Cell C's liquidity profile and debt capital structure to become increasingly vulnerable.

SA telecoms operators' ratings

S&P

Fitch

Moody's

Cell C local currency

D

Cell C foreign currency

D

Caa1

MTN local currency

BB+ negative

MTN foreign currency

BB+ negative

BB+ stable

MTN SA national scale

zaA

AA(zaf) stable – long-term; F1+(zaf) – short-term

Telkom local currency

BBB- negative

Telkom foreign currency

BBB- negative

Vodacom long-term SA national scale

zaAAA

Vodacom short-term SA national scale

zaA-1


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