International credit ratings agency Standard & Poor's (S&P's) is mulling an upgrade to Cell C's credit rating by one notch, which would indicate a positive move, but still leave the mobile network operator's debt at a “speculative” level.
The statement issued yesterday says it has placed its “B-” long-term corporate credit rating on Cell C on CreditWatch, with positive implications.
“At the same time, we placed the 'B' rating on the EUR400 million (about R3.6 billion) fixed-rate senior secured notes on CreditWatch with developing implications. The recovery rating on this debt is unchanged at '2', indicating our expectation of substantial (70%-90%) recovery in the event of a payment default,” the statement reads.
The difference between senior and subordinated debt is that the former is more likely to be paid out should a company either default on its debt or go bankrupt. Subordinate debt holders have to wait for whatever is left and so is considered a riskier investment.
S&P's is also placing the 'CCC' rating on the $270 million (about R1.92 billion) senior subordinated notes on CreditWatch with positive implications. The recovery rating on these notes is unchanged at '6', indicating the agency's expectation of negligible (0%-10%) recovery in the event of a payment default.
The CreditWatch placement reflects the potential positive effect that the partial refinancing of the EUR400 million senior secured bonds maturing in 2012, through a long-dated new credit facility, would have on the rating of Cell C.
In August, Cell C signed a loan agreement with the China Development Bank to the tune of EUR240 million and would use this to help buy back some of its EUR400 million denominated debt.
“Our CreditWatch rating is unchanged now, but we are watching Cell C with a view that this could improve,” says S&P's MD for SA and sub-Saharan Africa Konrad Reuss.
He says the improvement has very little to do with Cell C's R5 billion network upgrade or its improved financials.
In May, Cell C reported in its annual results that it had an increase of 14% in total revenue to R9.9 billion in 2009. Earnings before interest, tax, depreciation and amortisation (EBITDA) were at R1.4 billion in 2009 - a surge of 67% from the R0.8 billion reported in 2008.
Cell C's subscriber base rose by eight percentage points in 2009, to 6.8 million.
Speculative range
Reuss says most corporate bonds are in the B levels, or speculative range, with only very few large companies or sovereign debt ratings hitting the A level, or investor, grade ratings.
The partial buy-back of Cell C's debt is explained by S&P's saying that it understands that a maximum of EUR240 million could be tendered only, as Cell C's main creditor, Saudi Oger, the owner of Oger Telecom, Cell C's main shareholder, is required to retain at least EUR160 million of the notes.
S&P's credit analyst Guillaume Trentin says the ratings on Cell C are constrained by its negative free cash flow generation and aggressive debt leverage.
“We don't expect either of these elements to significantly improve in the near term, due to Cell C's planned network investments, persistently weak operating margins, and an increasingly competitive environment. The large debt maturity in 2012 also weakens Cell C's creditworthiness,” he says.
The ratings are supported, however, by the company's established brand in the steadily growing South African mobile market. They also reflect the ongoing liquidity support from Cell C's owner, Saudi Oger, increasing scale, and improving network capability.
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