Cell C long term rating affirmed
Standard & Poor’s Ratings Services said it affirmed its ‘B-‘ long-term corporate rating on South Africa-based mobile telecommunications operator Cell C (Pty) Ltd. We removed the rating from CreditWatch with positive implications, where it had been placed on Sept. 15, 2010. The outlook is positive.
At the same time, the ‘B’ rating on the €400 million fixed-rate senior secured notes remained on CreditWatch with developing implications. The recovery rating on this debt remained at ‘2’, indicating our expectation of substantial (70%-90%) recovery in the event of a payment default.
The ‘CCC’ rating on the $270 million senior subordinated notes remained on CreditWatch with positive implications. The recovery rating on these notes is unchanged at ‘6’, indicating our expectation of negligible (0%-10%) recovery in the event of a payment default.
The affirmation follows Cell C’s successful refinancing of €240 million of its €400 million senior secured bonds maturing in 2012, through a long-dated new credit facility. This refinancing improves the company’s liquidity profile. We understand that the remaining €160 million are entirely held by Cell C’s main shareholder, Saudi Oger Ltd., the owner of the company’s direct parent Oger Telecom Ltd. We also understand that Cell C will continue to pay coupons for these bonds.
“We believe that the lengthening of the company’s debt maturity profile, together with shareholder support, benefit the company’s liquidity prospects,” said Standard & Poor’s credit analyst Guillaume Trentin, “and the shareholder support will likely continue, in our opinion.”
Still, we believe that Cell C will need to rapidly turn around its recent negative EBITDA trend, and record meaningful earnings growth if it is to establish a cash-generative business before saturation of the South African mobile market. Cell C’s strategy consists of relaunching its brand while at the same time rapidly deploying its own 3G network. This will enable the company to expand its offering into mobile broadband services, potentially leading to market share gains and churn reduction.
Importantly, we understand that the magnitude of such network investments will depend on available funding, and that Cell C will tailor this spending so that it does not jeopardize the company’s liquidity.
In addition, market conditions look increasingly difficult for Cell C. We expect mounting competition following local fixed-line incumbent Telkom S.A. Ltd.’s (BBB/Stable/–) recent launch of its mobile business.
“The positive outlook reflects the possibility that we could upgrade Cell C by one notch, if it is able to achieve sustained EBITDA growth, improve profitability, and make pronounced progress toward generating positive free operating cash flow,” said Mr. Trentin.
We believe the increased EBITDA could stem notably from steady growth in the customer base and a reduction in current high churn rates. The company’s maintenance of sound medium-term liquidity prospects will also be an important consideration.
The outlook also reflects Standard & Poor’s expectations that Cell C will continue to receive timely financial support from its main shareholder to fund its activities and debt obligations, if needed. We expect that Cell C will tailor the level of its network investment to available funding, in order to not jeopardize the company’s liquidity position over the next year.
The ratings are likely to remain in the ‘B’ category in the medium term, because of the business challenges the company faces, and its high leverage.
Conversely, we could take a negative rating action if Cell C’s liquidity deteriorates without any supporting measures from parent company Oger Telecom. In addition, if Cell C fails to increase EBITDA and cash flows over the coming 12-18 months, either as a result of competition or difficult execution, we may take a less positive view of the long-term support from its shareholders, considering the risks and cost of financing loss-making subsidiaries.
Cell C long term rating affirmed << Comments and views
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