Cell C’s R2bn debt earns it a warning from ratings agency

Ratings agency Standard & Poor’s (S&P) has issued a warning over South African mobile operator Cell C’s R2bn unsecured debt.

The ratings agency has raised concern over the unsecured debt which has upcoming maturities in July. S&P has also issued a warning in light of Cell C continuing to generate negative free operating cash flow.

Subsequently, S&P says it is placing Cell C, which has a ‘B-‘ long-term rating, on CreditWatch negative. S&P says it intends to resolve the CreditWatch placement upon finalisation of the financing arrangements.

A possible downgrade for Cell C would mean that it would have to pay more for future debt.

“The CreditWatch placement reflects Cell C’s need to secure funding in the next month to address a July 1, 2015, unsecured debt maturity of about R2bn,” said S&P in a statement.

S&P does say that backing from Cell C’s parent company, Saudi Arabia’s Oger Telecom, could help the South African telecoms firm deal with its debt.

“We note that the company has a successful track record of financing its capital-spending programme and debt maturities with external funding and support from Oger Telecom. But we believe the tight maturity deadline limits financial flexibility and raises credit risk,” said S&P.

“We would likely take a negative rating action if Cell C didn’t secure financing prior to the end of June, or more generally, if our expectation of support from Oger Telecom declined,” added S&P.

S&P noted that it could affirm the ratings on Cell C if the company secures liquidity to cover its short-term cash needs. Meanwhile, S&P further said the “potential for a further positive rating action” is limited in the near term because it would require a meaningful improvement in profitability and its free operating cash flow (FOCF).

S&P added that if Cell C does not secure longer-term funding and hit breakeven free FOCF, the ratings agency then expects the mobile network’s liquidity to remain “weak” or “less than adequate”.

“In our opinion, Cell C’s business risk profile is primarily constrained by its relatively weak market position as the No. 3 operator in South Africa’s mature four-player mobile telephony market,” said S&P, referring to Cell C’s market share of approximately 20 million subscribers in SA.

“We acknowledge Cell C’s established brand, improving network quality, and customer growth. Still, leading competitors MTN Group Ltd and Vodacom Group Ltd continue to hold dominant positions, while Cell C and No. 4 player Telkom Mobile attempt to achieve scale and profitability,” said S&P.

Mobile termination rates

S&P, though, is forecasting revenue growth over the next three years at Cell C owing to the company winning more prepaid users thanks to competitive pricing and a support from mobile termination rates (MTRs).

MTRs are the rates telecommunication operators charge each other for terminating calls on their networks and the Independent Communications Authority of South Africa (Icasa) adjusted these rates to ensure that smaller operators such as Cell C and Telkom Mobile earn more from MTR than bigger players Vodacom [JSE:VOD] and MTN [JSE:MTN].

Explaining Cell C’s position further, S&P says the mobile network’s debt to Ebitda (earnings before interest, taxes, depreciation, and amortisation) ratio is forecast to be about 7.1x in 2015 and could improve to below 6.0x afterwards thanks to steady revenue and Ebitda growth.

Cell C will need additional funding to carry out network expansions. Earlier this year, Cell C announced plans to start building its LTE network at a cost of R8bn.

“Notably, in 2015, we expect that Cell C will require substantial external funding to finance its July 2015 debt redemption and to address its strongly negative FOCF, due to continued capital spending on its network,” said S&P.

“If Cell C obtains additional funding sources, we believe it will continue to expand its market share and improve margins, although the company will not achieve breakeven before 2017,” said S&P.

In its response to the warning Cell C spokespeople said the mobile operator has a strong track record in servicing its financings as noted by the S&P statement.

“Additionally, Cell C enjoys the full commitment of Oger Telecom to support Cell C with its financial requirements. The company is well on track to execute its plans to service the maturing bonds.

“On completion, Cell C fully expects S&P to resolve this credit watch given its technical,” said the company.

Earlier this year, reports emerged that Oger Telecom could be looking to sell Cell C. However, Cell C was not be willing to comment further on the reports.

Source: News24

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Cell C’s R2bn debt earns it a warning from ratings agency