OREANDA-NEWS. September 28, 2015. Fitch Ratings has affirmed Telecom Namibia Limited's (TN) Long-term local currency Issuer Default Rating (IDR) at 'BB+' and National Long-term rating at 'A-(zaf)'. The Outlooks are Stable. All ratings have been removed from Rating Watch Negative (RWN).

The affirmation and resolution of the RWN reflects our view that timely state support was forthcoming from the parent as TN faced a liquidity cliff in August 2015 as the bonds matured. In the financial year ending September 2015 (FY15), TN has received an equity injection of NAD400m from Namibia Post and Telecom Holdings Limited (NPTH), its 100% shareholder. The entire equity contribution has been applied to debt reduction.

The support received from the Ministry of Information and Communication Technology (ICT), and NPTH's board for TN's eight-point turnaround strategy, expected improvements in FY15 EBITDA and reduction in capex all support the Stable Outlook.

KEY RATING DRIVERS
State Support
Under Fitch's parent and subsidiary rating linkage methodology and in line with other Fitch rated state-owned Namibian entities, TN is rated on a top-down basis from the rating of its 100% shareholder, the Namibian government (BBB-/Stable). TN has strong operational and strategic links with the Namibian government. However, the legal links are limited. These include a NAD400m equity injection received in FY15, TN's ownership links with West African Cable System's (WACS) sub-sea cable landing rights and potential transfer of property from NPTH to TN in FY17 and guarantee for an European Investment Bank loan, which was settled in FY14, as well as providing important network links to local government departments, schools and hospitals.

Fitch views TN's standalone operating profile in the 'B' category, but due to the liquidity risks, the standalone rating without government support is 'CCC'. TN faces significant refinancing risk of its short-term debt.

Mobile Strategy
Fitch believes TN's management, NPTH's Board and the Ministry of ICT have acknowledged the shortcomings of the company's mobile strategy. We expect the turnaround strategy will be focused on the fixed line network and fibre backbone, and move away from an aggressive mobile coverage plan. This will entail TN improving mobile data services in major population centres and increasing the utilisation of the WACS cable. TN's eight-point turnaround strategy aims to improve cash flow, reduce debt, increase usage of data and improve customer service while stabilising the billing platform.

As TN has refocused the strategy, high capex in the mobile segment will cease. From FY11 to FY14 TN total capex was NAD1.2bn. From FY15 to FY18, Fitch forecasts capex will be approximately NAD600m. While TN will continue the fixed-mobile convergence (FMC) strategy, this will not be the key driver for growth. Fitch believes this will not result in significant revenue uplift as TN has weaker mobile coverage than rival Mobile Telecommunications Ltd (MTC). We believe TN's more limited mobile strategy will be focused on mobile data services, supported by its strong fibre backbone position.

Funding Requirements
Fitch believes the refocused strategy will result in a faster stabilisation of the business. We expect NAD59m of positive free cash flow (FCF) in FY15, driven by a recovery in underlying EBITDA margin to 17% in FY15 from 8.2% in FY14, together with a reduction in FY15 capex.

Fitch expects TN's funding requirement for the next 24 months will be approximately NAD460m. More than 83% of TN's debt was short-term at FYE14. The NAD400m equity received from the parent has been applied to debt reduction. As of August 2015, TN's bonds had reduced to NAD54m from NAD347m at FYE14. At FYE14, TN's overdraft limit was NAD455m of which NAD437m was utilised. Management has indicated it is negotiating with its banks and plans to convert the short-term facilities to a NAD300m term loan. This will likely be a syndicated loan, structured to allow an early payment of NAD200m from the planned sale of a 10.5% equity stake in Neotel. When the syndicated loan is put in place, we expect TN to have short-term facilities of NAD75m, of which NAD30m will be in Powercom.

TN has NAD54m outstanding bonds due February 2016. Fitch expects these will be settled from refinancing and operational cash flows. We expect capital intensity (capex/revenue) for the next four years to average around 10% (past four years averaged 24%), which should reduce the reliance on external debt to fund investments. Given the lower forecast debt levels (after the recent equity injection) together with improving EBITDA, we anticipate an improvement in funds from operation (FFO) adjusted net leverage to 3.5x in FYE15 from 9.8x at FYE14.

NPTH Unbundling
Fitch has been anticipating the simplification of TN's ownership structure for the past three years. The newly appointed Honourable Minister of ICT, Tjekero Tweya, announced earlier this year the re-appointment of NPTH's Board of Directors and provided a clear mandate to specifically implement the task of dissolving NPTH. Fitch expects some delays in the transfer of property from the holding company to individual state-owned companies, including TN.

We assume the transfer of properties will be concluded in FY17. As NPTH transfers the properties 100% occupied by TN, we expect to see a reduction in lease commitments and subsequently a reduction in the off balance sheet debt. Fitch believe once the structure is unwound this will likely mitigate conflicts of interest at NPTH and improve corporate governance.

LIQUIDITY AND DEBT STRUCTURE
Liquidity is expected to be weak. Following the equity injection outstanding debt is NAD491m (including short-term facilities) with FCF generation of NAD59m expected for FY15. Management expects to meet the remaining liquidity shortfall in part by refinancing the February 2016 maturing bonds of NAD54m, and converting NAD300m short-term facilities to a term loan among other options.

KEY ASSUMPTIONS
- Fitch expects TN's fixed voice revenues to decline by an average of 9% per year by FY2018.
- The agency believes the low level of penetration for data services places TN in a competitive position given the strength of its fibre backbone network.
- Fitch expects IP and other data services to drive revenue growth
- NAD200m received in FY17 from the sale of TN's Neotel stake.
- Buildings lease commitments to reduce by approximately 60% in FY17 at buildings currently leased from NPTH are transferred to TN. This will reduce the off balance sheet debt from FYE17 onwards.
- Capex assumed at an average of 10% of revenue for FY15-FY18.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating actions include:
- 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 TN's ratings and the sovereign's.

Negative: Future developments that could lead to negative rating action 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 delivery of mobile data services.
- 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.

RATING SENSITIVITIES FOR NAMIBIA'S SOVEREIGN RATING
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger a rating action are:

Negative:
- Fiscal slippage that leads to a material rise in the public debt to GDP ratio.
- Decline in foreign exchange reserves or a steep increase in net external debt ratios.
- Weaker growth prospects, for example related to significant delays in key mining projects.

Positive:
- Income convergence towards 'BBB' peers in the context of macroeconomic stability.
- Marked improvement in the fiscal and external balances.
- Improvement in the business environment and successful developments of new economic sectors that would reduce dependency on commodities and boost employment.