Ratings agency Standard & Poor’s has sounded a warning over Cell C’s debts and its ability to repay them, and has said this could trigger a downgrade in the mobile operator’s long-term rating of B-. Such a downgrade, if it were to happen, could affect Cell C’s debt-servicing costs and hike the cost of raising new debt.
“Cell C has about R2bn of unsecured debt with upcoming maturities and continues to generate negative free operating cash flow,” S&P said in a statement.
“Despite Cell C’s strong track record of securing external funding, we believe currently funded sources of liquidity do not cover the maturity. We are therefore placing our B- long-term rating on Cell C on CreditWatch negative.”
The agency said it intends resolving the CreditWatch placement upon finalisation of the financing arrangements.
At the same time, S&P said it has placed its B- issue rating on the company’s senior secured debt and its CCC issue ratings on its subordinated debt on CreditWatch negative. The recovery ratings on these debt instruments remain unchanged, it said.
“The CreditWatch placement reflects our view that Cell C will need to secure funding within the next month to address a 1 July 2015 unsecured debt maturity of about R2bn, S&P said.
“The company has a successful track record of financing its capital spending programme and debt maturities with external funding and support from its parent, Oger Telecom. If the company successfully raises external financing, we could resolve the CreditWatch.
It said it would “likely take a negative rating action” if Cell C is not able to secure financing prior to the end of June or if its expectation of support from Oger Telecom declined.
“In the absence of securing longer-term funding and achieving breakeven free operating cash flow, we expect that the company’s liquidity will remain ‘weak’ or ‘less than adequate’ as defined by our criteria.”
The agency said Cell C’s business risk profile is constrained mainly by its relatively weak market position as the number three operator in South Africa’s mature four-player mobile telephony market.
“We acknowledge Cell C’s established brand, improving network quality and customer growth. Still, leading competitors MTN and Vodacom continue to hold dominant positions, while Cell C and number four player Telkom Mobile attempt to achieve scale and profitability.
“We understand that Cell C’s strategy involves sizable investments in network and operations. Management hopes that these investments will enable the company to step up its market share to at least 15% over the next three years and rapidly increase revenues and Ebitda from 2015,” it said. Ebitda, or earnings before interest, tax, depreciation and amortisation, is a measure of operating profitability.
“We forecast increasing revenue growth over the next three years as Cell C garners more prepaid customers thanks to its competitive pricing strategy and support from asymmetric mobile termination rates.
“Although we see potential for Cell C’s investments to result in meaningful revenue growth, the improvement in profitability required to achieve breakeven within the next three years may be challenging and relies on better prices for telecoms services, in our opinion.”
In response to the S&P statement, Cell C said it has a “strong track record in servicing its financings”.
“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 nature.” — © 2015 NewsCentral Media
