Cell C’s ratings drop
Summary of rating actions
– Corporate family rating downgraded to Caa1 from B3;
– EUR400 million senior secured notes due 2012 downgraded to B3 from B2; and
-270 million senior subordinated notes due 2015 downgraded to Caa3 from Caa2
– Outlook on all ratings remains negative
The rating actions result from continued weakness in the company’s business and financial profile relative to initial expectations following the release of full year results to December 2006. The weaker position is due to a combination of factors:
– Cell C faces challenges to implement a business plan that incorporates aggressive assumptions growth in subscribers to address the deterioration in financial and operating performance
– Cell C has weak liquidity headroom and very limited financial flexibility
– The company’s highly leveraged capital structure with Total Debt/EBITDA of 10.9x (prior to adjusting for capitalisation of subscriber acquisition costs) and consequently the potentially increased exposure of Cell C’s creditors to higher default risk and lower recovery levels
– VMSA (the 50/50 Joint Venture with Virgin Mobile) has underperformed initial expectations for attracting subscribers and making progress towards profitability
– The high rate of churn continues despite management’s assertions that these rates were temporary in 2005. Cell C had a 96% churn rate for prepaid subscribers and incurred a 2.9% loss in the number of pre-paid customers in 2006
"The downgrades and continued negative outlook reflect Moody’s concerns that Cell C needs to implement, in it’s view, a challenging plan that addresses the deterioration in financial and operating performance in order to grow its subscriber base, reduce high churn rates and improve its financial position in the near term. Moody’s has also considered the likelihood of Cell C’s major shareholder, Saudi Oger, contributing further funding to the company, as a supportive factor in the rating," Moody’s said.
It added that one or more of the following are likely to result in further negative rating action:
– A continued decline in the company’s liquidity profile resulting in substantial reliance on external financing
– Failure to reduce the current high rates of subscriber churn;
– Further pressure on EBITDA margins as a result of pursuing or defending market share
Pressure to return the negative outlook to a stable outlook could occur once Cell C demonstrates that it can:
– Implement a business plan that addresses the deterioration in financial and operating performance, to demonstrate it can gain and retain subscribers without negatively impacting operating margins, and begin improving its generation of free cash flow;
– Demonstrate a track record of improvement in leverage such that Debt/EBITDA trends towards 8.5x on a sustainable basis;
– Reduce the current high rates of churn; and
– Stabilise and grow its subscriber base on a sustainable basis
Cell C, headquartered in Johannesburg, is the third mobile operator in the Republic of South Africa. For the 12 months ended December 2006, the company generated approx. R6.5 billion in revenue, with reported EBITDA of R459 million and a total subscriber base of approx. 3.3 million.
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