Fitch warns MTN on SA market

Fitch Ratings has assigned MTN Group a long term foreign currency issuer default rating of ‘BBB’, with a stable outlook.

Supervisory analyst at Fitch Ratings Southern Africa, Darshak Juta, pointed out that this first time rating would be applicable for foreign investors looking at MTN as an investment case and the group’s foreign currency debt.

In Afternoon trade on the JSE on Wednesday (19 June), shares in MTN declined 1.38% or R2.48 to R177.47, giving the group a market cap of R334 billion.

The agency said its ratings reflect MTN’s leading market position in most of the markets in which it operates. “The strong position allows the group to secure the high-revenue subscribers and generate the cash flow necessary to re-invest in network quality and value-added products such as mobile banking.”

Earlier in June, Fitch downgraded MTN‘s National Long-Term Rating to ‘AA-(zaf)’ from ‘AA(zaf)’ citing the group’s heightened business risk profile as a result of its growing reliance on cash generated from weak non-investment grade countries.

In  a ratings announcement on Wednesday (19 June), Fitch pointed to MTN’s adequate financial flexibility.

Fitch said it expects MTN’s funds from operations (FFO) lease-adjusted leverage to trend at or below 1.5x over the short to medium term.

“In addition, we also project pre-dividend free cash flow to sales to improve following two years of network investment in Nigeria and trending higher than 8% over the short to medium term.”

This, Fitch said, provides MTN with an adequate level of financial flexibility to enable the group to spend on network quality and coverage and thus retain its all-important leading market shares.

Country risk:

MTN’s business risk profile is heightened through its operational exposure to non-investment grade countries, the ratings agency pointed out.

In particular the group’s largest contributor of cash flow is Nigeria (‘BB-‘/Stable), which comprises 38% of consolidated EBITDA.

“While such countries typically have solid mobile prospects given low mobile penetration rates and non-existent fixed line infrastructure, the operations are susceptible to political instability and unpredictable regulatory authorities,” Fitch said.

South African market

Fitch reiterated its concern that with mobile penetration rates in South Africa now well in excess of 100% in addition to intensifying competition, the slowdown in MTN’s South African operations will place increasing reliance on cash flow growth from non-South African operations to service debt at the Holding Company (HoldCo) level.

“Fitch expect some in-market consolidation to occur in markets such as South Africa, but also across the continent, over the next three years. However, given the uncertain timing, we will treat this M&A risk on an event basis,” it said.

Structural subordination

Fitch said it accepts that borrowing locally in African markets not only provides a currency hedge against locally generated cash flow, but also makes strategic sense from a group funding perspective.

“However, Fitch highlights that with respect to the bondholders of MTN’s South African debt, the cash flows from the group’s non-South African operations are structurally subordinated given that MTN raises its funding on a non-recourse basis to HoldCo (MTN recently raised an additional $1.8  billion in debt facilities on a non-recourse basis to fund capex in Nigeria).

Fitch added that it takes comfort from the fact that MTN has historically been successful in circulating cash to the Holdco.

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Fitch warns MTN on SA market