October 9, 2017 / 9:32 AM / 10 months ago

Fitch Upgrades Telecom Namibia to 'BB+'; Outlook Negative

(The following statement was released by the rating agency) LONDON, October 09 (Fitch) Fitch Ratings has upgraded Telecom Namibia Limited's (TN) Long-Term Local-Currency Issuer Default Rating (IDR) to 'BB+' from 'BB' and National Long-Term Rating to 'AA(zaf)' from 'A(zaf)'. The Outlooks are Negative. The upgrade is supported by our view of the strengthening of the company's links with its ultimate shareholder, the Namibian government (BBB-/Negative), under our "Parent and Subsidiary Rating Linkage" criteria. The government provided a NAD400 million equity injection in financial year ended September 2015 (FY15). Government support to finalise the appointment of the board and managing director, taken together with improvements in liquidity and lower short-term debt in FY18 (leading to the standalone credit profile improving to 'BB-' from 'B-'), further support the upgrade. KEY RATING DRIVERS State Support: TN is rated on a top-down basis from the rating of the Namibian government due to its strong linkage with the government under Fitch's parent and subsidiary rating linkage methodology, and in line with other Fitch rated state-owned Namibian entities. TN has strong operational and strategic links with the Namibian government. This is demonstrated by a NAD400 million equity injection in FY15, TN's ownership links with West African Cable System's (WACS) sub-sea cable landing rights, potential transfer of property from Namibia Post and Telecom Holdings Limited (NPTH) to TN in FY18 and FY19, and important network links to local government departments, schools and hospitals. However, the legal links are limited, with no sovereign-guaranteed debt and no cross-default clauses with the sovereign. Standalone Rating: Fitch considers the improvement in the financial profile to support TN's standalone credit profile at 'BB-', up from 'B-'. The improvement follows the implementation of an eight-point turnaround strategy, which focused on improving cash flow, reducing debt and improving coverage and customer service while stabilising the billing platform. TN continues to focus on its fixed-line network and broadband services based on the strength of its national fibre backbone infrastructure. Data to Drive Growth: We expect most revenue growth to come from TN's fixed-data services, supported by its fibre backbone. TN's fixed-mobile convergence strategy will not be the key driver for growth. Stable EBITDA Margins: Fitch believes the refocused strategy has reflected a turnaround for TN. We estimate EBITDA margin to average 18% over 2017-2019. TN has returned to positive free cash flow (FCF) in FY16 and we expect this to be sustained in the rating case for 2017 to 2019. Short-Term Debt Level Decreases: The weak liquidity position had previously constrained the standalone credit profile. At end-September 2016, about 75% of TN's debt was short term, which we now expect to reduce to about 30% in FY18. The government provided a NAD400 million equity injection in FY15, which the company applied to debt reduction. The NAD200 million proceeds from the sale of a 10.5% equity stake in Neotel (Pty) Ltd to Liquid Telecom were received in FY17 and also applied to debt reduction. ZTE Reduces Accounts Payable: TN entered into a payment arrangement with ZTE Corporation, the Chinese telecommunications equipment company, and we expect the entire exposure to be settled in FY17. Accounts payable increased by NAD323 million in 2014 as a result of rising payables to ZTE. Delayed Rent Payments to NPTH: Unpaid rent to NPTH increased by 47% to NAD196 million in FY16 (NAD134 million in FY15). The fact that the government and NPTH do not require the increasing liability to be addressed is an additional element of parental support as the availability of these funds improves the liquidity position. DERIVATION SUMMARY TN's rating is driven by the support it receives from the government but it is notched lower than that of than Namibia Power Corporation (BBB-/Negative) under our parent-subsidiary linkage methodology, due to TN's weaker legal links. TN is also rated lower than Namibia Water Corporation (BBB-/Negative) as the strength of NamWater's standalone profile results in it being aligned with the sovereign rating while TN's standalone rating is lower at 'BB-'. TN's standalone financial profile is substantially weaker than that of NamWater, although it is broadly in line with that of NamPower. NamWater's funds from operations (FFO) adjusted net leverage is forecast to average -1.5x and FFO fixed charge coverage to average 20x during 2017 to 2019. NamPower's FFO adjusted net leverage is forecast to average 1x and FFO fixed charge coverage about 3x for 2017 to 2019. Fitch views TN's standalone credit profile one notch weaker at 'BB-' than sector peer PJSC Tattelecom (BB/Stable). Fitch forecasts TN's FFO adjusted net leverage to average 1.4x and FFO fixed charge coverage to average 3.9x for 2017 to 2019. We forecast Tattelecom's FFO adjusted net leverage to average 1.8x and FFO fixed charge coverage to average 4.6x for 2017 to 2019. Tattelecom financial profile is broadly in line with TN, however TN has a weaker liquidity position and limited visibility as it executes its turnaround strategy. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - fixed-voice revenue to decline by an average of 8% annually from FY17 to FY19; - IP and other data services to drive revenue growth as the low level of penetration for data services in Namibia places TN in a competitive position given the strength of its fibre backbone network; - data revenue to decline by about 20% in FY17 (although Fitch expects an increase in data volumes, the decrease in revenue reflects the declining data costs); - capex at about NAD400 million from FY17 to FY19; - NAD200 million cash proceeds from the sale of TN's Neotel stake in FY17. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Positive action on Namibia's sovereign rating, providing the strength of the parent-subsidiary links does not weaken - Increase in government support (in the form of government guaranteed debt or cross-defaults), which could narrow the one-notch differential between TN's ratings and the sovereign's Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Deteriorating operating profile, particularly any weakness in data related revenue and signs of margin pressure - Failure to improve liquidity in FY17 and FY18 - Downward pressure on the Namibian sovereign rating and/or a reduction in the 100% ownership of TN by the government Namibia's Rating Sensitivities Future Developments that Could Result in a Downgrade - A failure to narrow the fiscal deficit sufficiently to put the government debt/GDP ratio on a downward trajectory. - Failure to narrow the current account deficit or significant drawdown in international reserves - Weaker-than-expected economic growth, for example, due to a worsening of the business environment Future Developments that Could Result in the Outlook Being Revised to Stable - A narrowing of the budget deficit consistent with a downward trajectory of the government debt/GDP ratio - A marked improvement in the current account balance and increase in foreign exchange reserves LIQUIDITY Adequate Liquidity: At 30 September 2016, TN held aggregate liquidity of NAD51 million, comprising NAD16 million unrestricted cash and cash equivalents and NAD35 million of committed, undrawn bank facilities. This compares with short-term debt maturities of NAD298 million - Fitch understands that most of the short-term debt was repaid in FY17. Contact: Principal Analyst Richard Barrow Director +44 20 3530 1810 Supervisory Analyst Yeshvir Singh Associate Director +44 20 3530 1810 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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