Moody’s Investors Service has downgraded Telkom’s rating to Ba1 from Baa3 with a negative outlook.
In a statement this morning, Telkom says the rating action follows Moody’s recent decision to downgrade the South African sovereign rating.
Telkom’s rating is linked to sovereign rating due to government’s 40.5% stake in Telkom and its operational concentration in South Africa.
Last month, ratings agency Moody’s downgraded South Africa’s credit rating to junk or sub-investment grade.
Both S&P and Fitch, two other major ratings agencies, had downgraded the country’s credit rating to sub-investment grade in 2017.
In its statement, Telkom adds Moody’s has also affirmed the long-term national scale issuer rating at Aa1.za.
As part of its rating decision, Telkom says Moody’s indicated the rating reflects Telkom’s overall strong credit metrics which provide adequate headroom to the company’s operating and competitive challenges.
The company also has adequate levels of liquidity over the next 12 to 18 months with flexibility and sufficient levers to manage its cashflows, says Telkom.
Big blow
Moody’s decision comes as a blow to financially-constrained Telkom which announced major job cuts earlier this year.
In a statement, Moody’s says as the dominant South African fixed-line operator and the fourth incumbent mobile operator, Telkom has 100% operational concentration in SA.
“Moody’s classifies Telkom as a government-related issuer because it is 40.5% owned by the government. The rating downgrade to Ba1 from Baa3 reflects the fact the company is exposed to the risks associated with the political, social and economic environment in the South Africa. Moody’s has affirmed the long-term national scale issuer rating at Aa1.za.”
The Moody’s standalone Baseline Credit Assessment (BCA) of Ba1 reflects the agency’s view of Telkom’s overall strong credit metrics, with Moody’s adjusted debt to earnings before interest, tax, depreciation and amortisation (EBITDA) of 1.5x as of 30 September 2019, which provides a degree of headroom to the company's operating and competitive challenges faced in South Africa.
“The strong linkage between Telkom and the government of South Africa are captured by Moody's assumptions of ‘high’ default dependence reflecting the rating agency’s view that both the South African government and Telkom’s performance are highly correlated to the general business cycle in South Africa and ‘moderate’ support from the South African government.
Telkom has been facing challenges with declining revenues in fixed voice and fixed data services over the years.
Hurt by reduced voice revenues, the telecommunications company prioritised modernising its network.
Last month, Telkom said job cuts will cost the company a whopping R1.5 billion. After commencing phase one of a two-phase restructuring process, the operator said the restructuring process followed the technological shift to fibre, LTE/LTE-A as new sources of revenue, notwithstanding lower margins.
Telkom is also selling off more of its properties, saying the proceeds will be used to modernise the company’s network.
MTN’s rating unchanged
Meanwhile, MTN issued its own statement saying noteholders are hereby advised regarding the rating affirmation of MTN Group, being the issuer’s guarantor.
“Despite its sovereign rating downgrade of South Africa, Moody’s has left MTN’s rating unchanged and affirmed its Ba1 rating,” says the mobile operator.
“Moody’s has also revised MTN’s national scale CFR higher to Aa2.za from Aa3.za to reflect the updated mapping of Global Scale Ratings to NSR due to the downgrade of the sovereign rating.
“Moody’s has also left the negative outlook unchanged to reflect the exposure to weakening sovereign credit quality in some of MTN's key markets such as South Africa (Ba1 negative) and Nigeria (B2 negative).”
MTN notes Moody’s decision to affirm MTN’s rating resulted from the ratings agency’s view that the company’s healthy credit metrics and good liquidity will help to absorb the deterioration in the domestic macro-economic environment.
On MTN, Moody’s says: “MTN is the largest African-based mobile telecommunications operator in terms of subscriber base and revenues. South Africa is MTN’s home market and constituted 33% of group revenues and 27% of group EBITDA in 2019.
“The decision to affirm MTN's Ba1 CFR reflects Moody's view that the company’s healthy credit metrics and good liquidity will help to absorb the deterioration in the domestic macro-economic environment. Moody’s has also revised MTN's national scale CFR to Aa2.za from Aa3.za to reflect the updated mapping of Global Scale Ratings to NSR due to the downgrade of the sovereign rating.
“The negative outlook remains unchanged and reflects exposure to weakening sovereign credit quality in some of MTN’s key markets such as South Africa (Ba1 negative) and Nigeria (B2 negative). Moody's will continue to assess the near-term pressures that are building in these markets as the operating environment deteriorates and particularly related to the amount of hard-currency dividends that can be up-streamed from international operations.
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