Cell C will need to secure funding within the next month to address a July 1, 2015, unsecured debt maturity of about R2 billion.
This is according to Standard & Poor’s Ratings Services, who says that the company continues to generate negative free operating cash flow.
It has therefore placed the country’s third largest mobile operator on ‘B-‘ long-term rating with a CreditWatch negative.
It put cash funds from operations of about R90 million for the group and said that it confirmed, committed undrawn bank credit lines beyond 12 months of R30 million for Cell C.
“Despite Cell C’s strong track record of securing external funding, we believe currently funded sources of liquidity do not cover the maturity,” the ratings group said.
Cell C is not listed publicly, and therefore is not obliged to report its financial status.
According to a note by S&P on Monday (1 June), if Cell C successfully raises external financing, “we could resolve the Credit Watch”.
“Still, in the absence of securing longer-term funding and achieving break-even free operating cash flow (FOCF), we expect that the company’s liquidity will remain ‘weak’ or ‘less than adequate’ as defined by our criteria.”
“In our opinion, Cell C’s business risk profile is primarily constrained by its relatively weak market position as the No. 3 operator in South Africa’s mature four-player mobile telephony market,” S&P said.
It noted that Cell C’s strategy involves sizable investments in network and operations. In April, Cell C said it will invest R8 billion in its LTE network over the next three years, aiming to deliver high-speed broadband to its customers across South Africa.
S&P also noted that the operator’s 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.
“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,” S&P said.
Last month, Cell C launched a campaign to pay new customers up to R10,000 to cancel their contract with rival operators including Vodacom and MTN.
The group said that its customer base is close to 21 million, up from just under 10 million in 2011.
“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,” the ratings group said.
It stressed that its assessment of Cell C’s financial risk profile also incorporates its base-case assumption that the company will remain reliant on debt issuance and financial support from Oger Telecom, its largest shareholder.
“Notably, in 2015, we expect that Cell C will require substantial external funding to finance its July 2015 debt redemption and to address its strongly negative FOCF, due to continued capital spending on its network,” S&P said.
“If Cell C obtains additional funding sources, we believe it will continue to expand its market share and improve margins, although the company will not achieve break-even before 2017.”
It said it considers the potential for a further positive rating action as limited in the near term because it would require a meaningful improvement in profitability and significant progress toward generating positive FOCF.
Last month, Cell C said that total revenue increased by 3% year-on-year.
As recently as march, Reuters reported that Cell C’s largest shareholder Oger Telecom is looking at selling its stake in the company . Cell C is 75%-owned by the Lebanese firm.