Massive problems at Liquid Telecom

Fitch and Moody’s have downgraded Liquid Telecom’s credit rating as the company nears a breach of its debt covenants.

Liquid attempted to reassure the market during its annual results presentation, with CEO Hardy Pemhiwa reporting that the company is nearing a $90-million (R1.7 billion) cash injection in fresh equity.

However, Fitch said there was still a high risk that management’s plan could fail to deliver the necessary cash relief on time.

Liquid has also informed staff that former CEO Nic Rudnick is stepping down as deputy executive chairman. Rudnick served as Liquid Group CEO for eighteen years, stepping aside in September 2022 to take the deputy chair role.

Moody’s Investors Service downgraded Liquid from “B3” to “Caa1” on 4 June 2024 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.

Pemhiwa said the $90-million equity injection included an investment from the US International Development Finance Corporation.

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.

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.

“Liquid Telecom is reliant on external financing, such as fresh equity and asset monetisation in addition to improved operating conditions, to avoid a liquidity crisis and a covenant breach on its South African rand loan.”

Fitch said Liquid’s corrective actions, which include a combination of reduced discretionary capital expenditure, better working capital management and operating efficiencies, and external funding, could enable a refinancing at par.

“However, this is subject to execution risks as details of such refinancing are not yet available,” it stated.

“Failure to execute it successfully in a timely manner could increase the prospects of a debt restructuring event and likely drive further negative rating action.”

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.”

Fitch also highlighted that Liquid faces a cash crunch.

“Liquid Telecom had $57 million (R1 billion) cash on its balance sheet, but $43 million (R790 million) of cash was drawn from the revolving credit facility at the end of the 2024 financial year,” it explained.

“Cash declined to $48 million (R882 million) in Q1 of the 2025 financial year with the revolving credit facility substantially drawn, amid continued foreign exchange pressures, compared with $40 million (R735 million) required for operations.”

Fitch said a liquidity crisis was avoidable with the first $23-million (R423 million) tranche of the equity injection together with $25-million (R459 million) income from Africa Data Centres.

“This will ease short-term liquidity constraints by providing cash to reduce gross debt but may not be sufficient to avoid a covenant breach, which would need to be cured or waived by lenders,” Fitch warned.

Fitch said it did not factor in the receipt of a second equity tranche as timing has not been confirmed by management, but it could provide an additional $34 million (R625 million).

For Liquid to actually default on its loans, Fitch said 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.

Nic Rudnick quietly steps down

Following its last financial results and the Fitch downgrade, Liquid told staff that Nic Rudnick was stepping down.

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.

Hardy Pemhiwa took over as Liquid Intelligent Technologies CEO from Rudnick.

“Following more than 20 years in the company, Nic has decided to step down from executive responsibilities and will continue to serve the company as a non-executive director,” Liquid told MyBroadband when asked for comment.

Liquid also said that Rudnick remains a shareholder of the company.

“With regards to our debt covenants, we monitor it closely and like all other issuers, we report on these to the market every quarter,” Liquid said.

“Our bond is only due in September 2026. Although this is two years away, as a responsible issuer we have proactively started the process of refinancing which we provided an updated to our bond investors on our last results call.”