Fitch Places Telecom Namibia on Rating Watch Negative
KEY RATING DRIVERS
The RWN reflects deterioration in TN's financial profile and its weak liquidity position. TN faces a liquidity cliff, including a bond maturity of NAD200m due in August 2015. Repayment of the bond, along with funding for its ongoing operations, is in Fitch's view dependent on a capital injection from the government. Fitch applies its parent subsidiary linkage criteria to TN's ratings, which are notched down two levels from the government of Namibia's Long-term local currency IDR of 'BBB'.
Government Support
The government of Namibia, through Namibia Post and Telecom Holdings Limited (NPTH 100% owned entity), has pledged NAD400m equity injection into TN. Of this NAD176m was received as of end-June 2015 and a further instalment is scheduled to be made ahead of the August bond maturity. This, along with previous indications of support, suggests tangible government support for TN and currently underpins its ratings.
The 'BB+'/'A-(zaf)' ratings assume the imminent receipt of the final tranche of the NAD400m equity injection in August 2015 and the government's willingness to provide or contribute to further funding given Fitch's forecasts that TN is likely to remain free cash flow (FCF)-negative over the next two years.
Standalone Rating
Fitch views the standalone profile of TN (without government support) at 'CC'. Investments in mobile network and the related high execution risk in rolling out this business have increased the overall group's liquidity risk. TN faces refinancing risk in its short-term debt unless those facilities are extended.
Funds from operations (FFO) deteriorated to NAD1m in 2014 from NAD151m in 2013, increasing TN's adjusted net leverage to 10.1x from 5.4x. FFO fixed charge coverage fell to 1.0x from 3.5x during the same period. The erosion of TN's cash flow generation is set to continue into the rest of 2015 and potentially into 2016, given declines in the company's fixed- voice revenue and lower-than-expected growth from mobile.
Resolution of RWN
Fitch is due to meet with TN management in the next month. The resolution of the RWN will depend on Fitch gaining an understanding of management's plans to address the operational weakness within the business while materially improving the company's liquidity. This is likely to include an insight of the government's willingness to inject further funding beyond the currently proposed NAD400m and how external funding is expected to be structured.
Given the current standalone profile of the business evidence of a material weakening in government support is likely to result in a multi-notch downgrade of the ratings.
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating actions include:
- A positive action on Namibia's sovereign rating, providing that the strength of parent subsidiary linkage does not weaken
- Significant, tangible government support, which could narrow the two-notch differential between the ratings of TN and the sovereign
Negative: Future developments that could lead to negative rating actions include:
- Lack of evidence of an improvement in TN's operating profile over the next 12-18 months, particularly a significant improvement in fixed revenue trends and material gains in mobile market share
- A weakening of financial profile as evidenced by higher FFO-adjusted net leverage sustainably above 4.5x without tangible indications of financial support from the government
- Downward pressure on the Namibian sovereign rating and/or a reduction in the 100% ownership of TN by the government
LIQUIDITY AND DEBT STRUCTURE
We expect liquidity to be weak due to negative free cash flow (FCF) and maturing debt in 2015. TN had NAD58m of cash at end-May 2015. This compares with NAD716m of short-term debt and Fitch's expectation of negative FCF for 2015. Management expects to meet the liquidity requirements through government equity contribution of NAD400m and refinancing of TN's short-term overdraft facilities.
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