Liquid’s R4-billion funding plan

A US development agency will be one of the main investors as African fiber company Liquid Telecoms seeks to raise $225 million (R4 billion) in equity by the end of the year, chief executive officer Hardy Pemhiwa told Bloomberg news.

The International Development Finance Corporation (DFC) will be one of the biggest participants in a $90-million (R1.6 billion) tranche in the next few weeks, while Liquid plans a second round later in the year, he reaffirmed.

Pemhiwa’s comments to Bloomberg come after Fitch and Moody’s downgraded Liquid Telecom’s credit rating as the company nears a breach of its debt covenants.

On 4 June, ahead of Liquid’s annual results presentation, Moody’s Investors Service downgraded the company from “B3” to “Caa1” with a negative outlook, moving it from a status of “highly speculative” to “substantial risks”.

On 27 June, Liquid held its annual results presentation, where it explained its plan to avoid breaching its debt covenants.

However, Liquid’s results revealed an extremely challenging financial situation. For Q1 2025, the company’s net debt stood at $930.6 million (R17.1 billion), and its net debt to EBITDA ratio was 3.47.

Liquid has a R3.3 billion loan due in March 2026 with a debt covenant threshold of 3.5× net leverage.

Lenders previously relaxed this covenant threshold to give Liquid more headroom. This grace ends on 31 August 2024, when the threshold will step down to 3.0×.

Even if Liquid pumped the whole $90 million of fresh equity into debt, its EBITDA would have to increase substantially to avoid breaching its loan covenant.

In addition to the term loan, Liquid has $620 million (R11 billion) in bonds due in September 2026.

As a result, Fitch downgraded the company’s credit rating from B to CCC+ on 11 July 2024.

“The downgrade reflects Liquid Telecom’s weak liquidity position and heightened refinancing risk,” the rating agency stated.

The rating agency explained that Liquid’s management is in discussions with key lenders to refinance the R3.3-billion term loan.

“We believe timely refinancing is contingent on material additional external funding, lower leverage, and positive operating cash flow, excluding Zimbabwe, after the impact of foreign exchange to service higher interest rates on new debt.”

While Liquid is close to breaking its loan covenants, Fitch emphasised that for Liquid to actually default on its loans, a lot would need to go wrong.

It said it expected a default from factors such as higher competitive intensity, increased technological risk, loss of key contracts, adverse regulatory or political actions, or considerable currency depreciation in key geographies.

“This would result in financial loss, reputational damage or prohibitive regulatory fines or conditions,” it said.

However, it also warned that Liquid could face further downgrades if progress is not made in refinancing existing debt at par.

Ineffective implementation of management actions to improve operating performance, accelerating negative free cash flow, could also result in further downgrades.

Following its last financial results and the Fitch downgrade, Liquid told staff that former CEO and deputy executive chair Nic Rudnick was stepping down. He remains a shareholder of the company.

Rudnick became the company’s CEO in 2004, when it was rebranded from Econet Satellite Services to Liquid Telecom, and subsequently to Liquid Intelligent Technologies.

He stepped down from the CEO position of Liquid Intelligent Technologies in September 2022 to take up the position of deputy executive chairman.

Bloomberg reported that geopolitical competition between the US and China is heating up in Africa, with its growing population and vast mineral resources, and development institutions such as the DFC are a key way to engage economically on the continent.

Digital services in Africa are bridging gaps in countries that lack legacy infrastructure, even though it remains the least connected region in the world.

Liquid is working with US tech giants Microsoft and Google on broadband projects in east Africa, according to Pemhiwa.

The project with Microsoft aims to deliver affordable broadband through last-mile connection to 20 million Africans across Kenya and Zambia, he said.

The infrastructure firm will also work with Google to build out terrestrial fibre that travels through South Africa, Kenya, Uganda, Rwanda, Zambia, Zimbabwe and the Democratic Republic of Congo.

The route will provide connectivity to a number of data centers and an alternative option to deal with traffic in the event of a subsea cable outage between South Africa and Kenya, Pemhiwa said. 

Liquid has laid over 110,000 kilometres (68,000 miles) of fibre across Africa as demand for higher-speed Internet links and data storage increases.

Reporting with Bloomberg