December 2, 2016 / 3:57 PM / 8 months ago

Fitch Revises MTN Group Limited's Outlook to Negative, Affirms at 'BBB-'

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(The following statement was released by the rating agency) LONDON, December 02 (Fitch) Fitch Ratings has revised the Outlook on MTN Group Limited's (MTN) Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'BBB-'. A full list of rating actions is at the end of this commentary. The Negative Outlook reflects the deterioration in the operating environment, regulatory pressures in the Nigerian market, weaker free cash-flow generation and the increasing leverage of the South African operations (including the group holding companies). The FX mismatch between net debt and cash flow could lead to higher leverage if the US dollar strengthens. The sovereign ratings of MTN's two main countries of operations have been under pressure. South Africa (BBB-/Negative) was downgraded in December 2015 followed by a change to Negative Outlook in November 2016, while Nigeria (B+/Stable) was downgraded in June 2016. MTN's rating is constrained by the South African sovereign rating. KEY RATING DRIVERS Weaker Free Cash Flow: Competitive pressure and a weaker economic backdrop, particularly in South Africa, and wider regulatory pressures have hampered growth and profitability. The regulatory fine in Nigeria and increased capex in South Africa and Nigeria has also contributed to a weakening of MTN's free cash-flow generation. Lower cash dividends paid to shareholders should fully come through in 2017. Management has guided for a 2016 dividend per share of ZAR7.00 (ZAR13.10 per share declared for 2015). Leverage for the South African operations and (including the group holding companies) increased at the end of 1H16 to 2.2x against 1.3x at year-end 2015, according to our calculations, due to the lack of dividend payments from the Nigerian operations together with higher capex in South Africa. There is a risk that this metric could breach our rating sensitivities for a downgrade within the next 12 months. The reduced level of cash upstreamed means MTN has had to increase borrowing to ensure liquidity at the parent. Recent bond issuance and new credit facilities show that MTN still has good access to the capital markets. FX Mismatch: Over half of net debt in South Africa, Nigeria and the head office was denominated in US dollars at the end of 1H16. The majority of group cash flow is generated in rand, naira and other African currencies. This FX mismatch means that a strengthening dollar would potentially increase leverage. Operational Challenges Impacting Performance: MTN continues to face various operational challenges throughout its emerging-market exposure with weak economies depressing consumer spending in many of its regions. Continued weakness in the macroeconomic and operating environments of MTN's main operating subsidiaries could negatively impact MTN's rating. MTN remains well positioned in each of its operating countries either as the largest or second-largest mobile operator. Underlying demand for mobile services remains strong and MTN continues to invest with increases in capex supporting 4G and LTE rollouts to sustain the group's continued strong growth in data. Nigerian Regulatory Pressures: Competitiveness in MTN's largest market Nigeria was affected in 2015 and 1H16 by the suspension of regulatory services limiting the group's ability to introduce new pricing plans. This, together with the disconnection of subscribers and increased expenses, has resulted in declines for both revenues and profitability in one of MTN's key markets. We expect margins to remain under pressure, but MTN continues to solidify its leading position in this market through increased capex, and despite the challenges it faces, has managed to increase its market share in 1H16. Nigerian Fine Limits Dividend Remittance: The lack of forex liquidity in the Nigerian economy as a result of the naira peg to the dollar previously limited the ability of MTN to remit dividends from the Nigerian operations to the parent company. Getting access to dollars in Nigeria remains challenging even after the devaluation of the naira in June 2016. Following the settlement of the fine, this is less of an issue as the Nigerian operating company will be unlikely to have distributable reserves available until 2017. Iran Opportunities: The easing of sanctions in Iran has allowed the group to start the process of repatriating cash from the Iranian operations. There is still uncertainty around when MTN can fully gain access to the roughly ZAR15bn owed to it. MTN has a 49% stake in Irancell, its Iranian joint venture. South Africa Sovereign Outlook Revision: Fitch revised the South African sovereign Outlook to Negative from Stable in November 2016 and affirmed the country at 'BBB-'. The Outlook revision was largely driven by increasing political risks to standards of governance and policy making, modest GDP growth expectations and a deterioration in the budget deficit forecast. For a full explanation of the key rating drivers see "Fitch Revises South Africa's Outlook to Negative; Affirms at 'BBB-'", published on 25 November 2016. DERIVATION SUMMARY MTN is well positioned relative to its closest TMT peers of Etisalat, Bharti and Vimpelcom considering its strong geographic diversification and market-leading position in a majority of its regions. The group's margins remain high for the sector reflecting its operating profile strength. These strengths are offset by the lack of regional stability in some markets (Nigeria, Syria) and accompanying regulatory risks in these regions. Continued weakness in the macroeconomic and operating environments of MTN's main operating subsidiaries could negatively impact MTN's rating. MTN's rating is constrained by the South African sovereign rating. No parent/subsidiary aspects affect the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - reported revenue growth in the low single-digit percentage points in 2016, with 2H16 hit by naira weakness, 2017 reported revenue growth to be in the high single-digit negative percentage points as the weaker naira has a full year of impact; - underlying EBITDA margin pressure to continue, with margin reaching around 35% in 2017 (40.9% in 2015); - capex as a percentage of revenue of 23.5% in 2016, before dropping to around 20% in 2017; - declared dividend per share of ZAR7.00 in 2016 and 2017 (ZAR13.10 in 2015). RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - An upgrade is unlikely in the short term, due to MTN's significant exposure to countries with high political and regulatory risk. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Downgrade of the South African sovereign rating. MTN will not be rated higher than the South African sovereign rating. - Consolidated funds from operations (FFO) adjusted net leverage sustainably above 2.5x (2015: 1.8x). - If consolidated FFO adjusted net leverage approaches the 2.5x threshold, net debt/EBITDA at material operating subsidiaries (most notably MTN Nigeria) approaching the group average would put pressure on the rating. - Pressure on operating cash flow in MTN's key markets driven by increased regulatory and competitive pressures or increased capital expenditure. - Expectations of a reduction in dividends received from the operating subsidiaries that would lead to an increase in leverage of the South Africa operations (including the group holding companies). On an unconsolidated basis and using Fitch's estimate of dividends received from these operating companies, net debt/EBITDA plus dividends for South Africa including the holding companies over 2.5x (end 2015: 1.3x, end-1H16: 2.2x) would put pressure on the ratings. South Africa Sovereign Rating Sensitivities: The following risk factors could, individually or collectively, result in a downgrade: - continued political instability that adversely affects standards of governance, the economy or public finances; - a failure to stabilise the government debt/GDP ratio or an increase in contingent liabilities; - failure of GDP growth to recover sustainably, for example, due to sustained uncertainty about economic policy; - rising net external debt to levels that raise the potential for serious financing strains. The Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a high likelihood of leading to an upgrade. However, future developments that may, individually or collectively, lead to a positive rating action include: - a track record of improved growth performance; - a marked narrowing in the budget deficit and a reduction in the government debt/GDP ratio; - a narrowing in the current account deficit and improvement in the country's net external debt/GDP ratio. FULL LIST OF RATING ACTIONS MTN Group Limited -Long-term IDR: affirmed at 'BBB-', Outlook revised to Negative from Stable -National Long-term Rating: affirmed at 'AA(zaf)', Outlook revised to Negative from Stable -National Short-term Rating: affirmed at 'F1+(zaf)' MTN Holdings (Pty) Limited -Senior unsecured rating: affirmed at 'AA(zaf)' Contact: Principal Analyst Damien Chew Senior Director +44 20 3530 1424 Supervisory Analyst Richard Barrow Director +44 20 3530 1256 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Roelof Steenekamp Senior Director +49 69 768 076 113 Date of Relevant Rating Committee: 1 December 2016 Summary of Financial Statement Adjustments - Fitch adds a 6x multiple of operating leases, totalling ZAR51.6bn, to debt in line with its methodology. Fitch also adjusts restricted cash by ZAR336m to reflect the total cash in Syria and Sudan. 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