Cell C downgraded to lowest junk rating

Mobile operator Cell C has had its corporate credit rating downgraded after missing an interest payment on its senior secured bonds, ratings firm S&P Global has announced.

The firm said that it has lowered Cell C’s long-term corporate credit rating from ‘SD’ to ‘D’ after it missed the payment, and also lowered the company’s issue rating from ‘CC’ to ‘D’ on the €400 million (R5.7 billion) senior secured bonds due in 2018.

A ‘D’ rating for corporate credit is the lowest ‘junk’ level rating on the scale used by S&P.

“We revised our recovery rating  on the senior secured debt to ‘4’ from ‘3’. The ‘4’ recovery rating reflects  our expectation of approximately 45% recovery in the event of a payment default,” S&P said.

“The downgrade reflects our view that the delay in concluding the restructuring agreement continues to constrain Cell C’s liquidity, and that the company’s decision to miss interest payments in January 2017 on its €400 million senior secured bonds due in 2018, is a default.”

The reasoning behind this firm stance is that Cell C had received waivers from its lenders for missing principal payments through January 2017 on its debt instruments, but it is now beyond the waiver period and has missed interest payments on its senior secured bonds.

On a more positive note, S&P said that the company has not sought bankruptcy protection, and is still expected to continue to operate and meet its non-debt obligations, including payroll and suppliers.

“However, we note that the company currently relies on its lenders not exercising their acceleration rights as negotiations on a restructuring continue,” it said.

Blue Label uncertainty

Cell C is currently in the process of restructuring its debt in an acquisition deal involving Blue Label Telecoms and other shareholders. As such, the current downgrade will be reviewed if and when a deal materialises, S&P said.

However, even then, the company faces some hurdles, justifying S&P’s level of a 45% recovery rate.

“The revised recovery rating and lower recovery prospects are mainly due to  uncertainty over a potential buyer’s ability to have unrestricted use of Cell  C’s spectrum, and the resulting impact to its value in a bankruptcy scenario,” the group said.

The firm cited the case in 2015, where the Independent Communications Authority of South Africa (ICASA) placed restrictions on the use of Neotel spectrum by Vodacom, when the latter attempted to purchase Neotel.

“Uncertainty over which potential buyers could emerge and whether ICASA could restrict
spectrum use makes Cell C’s spectrum assets difficult to value. As such, our expectations for recovery could significantly improve or weaken depending on the circumstances,” S&P said.

“If the restructuring negotiations conclude successfully, we could revise our recovery ratings based on the new capital structure and ownership.”

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Cell C downgraded to lowest junk rating