… a negative outlook
WINDHOEK – Fitch Ratings has affirmed Telecom Namibia Limited’s Long-term local currency Issuer Default Rating of ‘BBB-‘ and national long-term rating of ‘A (zaf)’. The outlooks are negative.
The affirmation continues to reflect the one notch differential of Telecom Namibia’s ratings with those of the Namibian sovereign’s local currency ‘BBB’ stable. This is because of Telecom Namibia’s dependency on government for its financial guarantees.
“The negative outlook signals Fitch’s concern that the standalone credit profile is weakening and if this decline is severe, without early indications of support from the government, it may result in a multi-notch widening between Telecom and the Namibian government to reflect more imminent liquidity concerns,” the agency says in a statement.
The Fitch Rating Agency says its rating of Telecom is in line with other rated Namibian state companies, and assessed that the Telecom “standalone rating would be significantly below the support-driven rating level and would otherwise be in the ‘BB’ stand-alone category.”
The group still benefits from perceived support from the Namibian government given its fixed-line incumbent status and strategic telecoms ownership links with the West African Cable System’s (WACS) sub-sea cable landing rights and usage, as well as providing important network links to local government departments, schools and hospitals.
In November 2012 Telecom completed the purchase of Powercom, trading as Leo, Namibia’s struggling second mobile cellular phone network operator. Telecom announced then the final plans to ramp up its GSM coverage, invest in nationwide LTE and push new bundled triple-play products to enterprises and consumers.
Coinciding with the mobile investment, Telecom plans to upgrade its fibre network taking fibre closer to the home. “While necessary to be able to take advantage of the WACS cable landing and improve speeds to Namibian nationals and enterprise – the fibre to-the-x upgrade comes at an awkward time from a cash flow perspective,” Fitch agency noted.
With Telecom’s plans to become a fixed-mobile convergence player in Namibia the market is set to become significantly more competitive. MTC, the Namibian market player in the mobile cellular phone network market with almost 90 percent of current mobile subscribers, is also rolling out fixed-line infrastructure to compete with bundled offerings. Government owns 64 percent of MTC.
Fitch further notes that the prospect for price discounting and lower margins in what amounts to a small population is real and potentially damaging to both entities. Telecom has ambitious plans to win significant revenue market share of the Namibian mobile market by 2017. Fitch notes that this plan has marketing merit as Telecom is in a duopoly market and will benefit from a much stronger fixed-line position, but it is not without significant execution risk. Fitch also notes that precedent exists for a successful late state-owned entrant into a duopoly market.
Fitch views the up-front, short-term investment profile required to acquire and invest in Leo’s GSM/LTE network, as well as investment in the upgrading of its fixed-line as stretching the company’s cash flow leverage. “If revenue growth from the investment is slower than expected or the market more competitive, pressure will quickly grow on the company’s leverage profile and ability to refinance its 2015 existing bond maturity.
“Fitch estimates funds from operations (FFO) adjusted net leverage could rise above 4x by 2015 implying benevolent bond markets or the support of the government by way of potential equity injections in order to protect its rating profile,” the agency said. Nevertheless, the agency says future developments that may lead to a positive rating action include a positive action on Namibia’s sovereign rating which would result in a positive rating action for Telecom provided the strength of parent subsidiary linkage does not weaken.
Otherwise the negative prospects could come from the fact that by July 2014 Telecom would have generated market leading fixed-mobile bundled subscriber growth, predominantly new government department subscribers, without incurring significant margin dilution. In addition, a weakening financial profile as evidenced by higher funds from operations adjusted net leverage metrics in excess of a specific higher threshold without tangible indications of financial support from the government.
By Staff Reporter