South Africa’s third biggest mobile operator, Cell C, has been downgraded after missing an interest payment, S&P Global Ratings has said in a statement.

The rating agency downgraded Cell C to “D”. According to the agency’s website, an obligation rated “D” is in “default or in breach of an imputed promise”.

“Cell C faces constrained liquidity because of an ongoing delay in concluding a restructuring agreement, and the company has missed interest payments on its senior secured bonds, as well as other unrated debt instruments,” S&P Global Ratings said.

The operator is in the throes of a significant restructuring in terms of which JSE-listed Blue Label Telecoms is set to acquire a 45% stake for R5,5bn.

S&P said it is lowering its rating from “SD”, or “selective default’, to “D” and also lowering its issue rating on the company’s €400m senior secured bonds due in 2018 to “D” from “CC”.

“We are revising our recovery rating on the senior secured bonds to ‘4’ from ‘3’, based on a downward revision to our valuation assumption,” the agency said. “We expect to reassess Cell C’s creditworthiness under its new capital structure if the company finalises the refinancing.”

It said the “4” recovery rating reflects its expectation of approximately 45% recovery in the event of a payment default.

“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 €400m senior secured bonds due in 2018 is a default.

“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. The company has not sought bankruptcy protection, and we expect it will continue to operate and meet its non-debt obligations, including payroll and suppliers.

Uncertainty over which potential buyers could emerge and whether Icasa could restrict spectrum use makes Cell C’s spectrum assets difficult to value

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

It said its 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”.

In explaining its reasoning, it said that in 2015, communications regulator Icasa placed restrictions on the use of Neotel’s spectrum by Vodacom when the latter attempted to acquire the former.

“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.”

It said, however, that if the restructuring negotiations are concluded successfully, it could revise its recovery ratings based on the new capital structure and ownership.

In a statement e-mailed to TechCentral in response to the S&P Global downgrade, Cell C said it is “currently engaged in a recapitalisation process, which is essential to delivering a sustainable capital structure” for the business.

“As part of this process, various capital and interest payments to lenders have been deferred. This has no direct impact on the underlying business of Cell C and the operational performance of the company remains strong.”

The S&P downgrade comes just weeks after Cell C said it would hike prices. It blamed the rand for the increases, which took effect on 1 February.

“Rising inflation, the depreciation of the rand against the dollar and uncertainty in the industry over the allocation of spectrum, have all contributed to an increase in the cost to provide mobile services to consumers,” the company said in a statement at the time. — © 2017 NewsCentral Media