07 Oct 2014/Fitch Ratings

(This statement was released by Fitch Ratings Oct 07, 2014)

Fitch Ratings-London-07 October 2014: Fitch Ratings has affirmed MTN Group Limited’s (MTN) Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB’. The Outlook is Stable. A full list of rating actions is below.

MTN’s ratings benefit from its strong domestic market position and conservative financial profile. International operations provide diversification in higher growth markets across Africa, with a significant stream of cash dividend payments to support debt service at the parent company as well as shareholder distributions. Non-recourse funding at the local level gives MTN a natural hedge against political, macroeconomic and foreign exchange risk across its African footprint. The group continues to face competitive and regulatory challenges in South Africa and its other main markets, which are expected to pressure market share and margins.

KEY RATING DRIVERS
Non-recourse Debt Structure
MTN primarily raises debt for its domestic operations through its intermediate holding company MTN Holdings (Pty) Ltd with subsidiaries also raising debt locally to fund their operational and capex requirements. Operating subsidiary debt is largely raised on a non-recourse basis to the South African holding company. This structure allows MTN to better match asset and liabilities, giving it a natural hedge against political, macroeconomic and foreign exchange risk. The presence of cross-default language at the South African holding company level requires the leverage and performance at material operating companies (notably Nigeria) to be monitored.

Parent Company Leverage
MTN is able to access cash generated at its subsidiaries through dividends and management fees to support debt service at the parent company level. Fitch estimates that MTN’s share of dividends paid by its international subsidiaries was around ZAR14bn in 2013, of which around ZAR9bn came from the group’s Nigerian operations. On an unconsolidated basis at MTN’s South African business and the parent company, 2013 net debt/EBITDA was 1.0x. Factoring in these estimated dividends from international operations would mean that net debt/EBITDA plus dividends was just over 0.5x.

Any expectation of a significant reduction in the dividends from the international subsidiaries upstreamed to the parent company would be a credit risk. This could arise because of a underlying weakness in cash flow generation (eg EBITDA less capex), a significant increase in leverage at the operating subsidiaries, or a change in the subsidiaries’ dividend policy.

South African Market Challenges
The South African market has a high level of mobile penetration and MTN South Africa (24% of 2013 group EBITDA) is facing aggressive competition and regulatory pressure. This has resulted in declining revenue and margin, both of which are likely to face further pressure from further cuts in mobile termination rates. The group has instituted a cost saving programme in order to address margin reduction and is expecting to rationalise costs associated with employees, distribution and marketing.

Conservative Financial Profile
MTN’s consistent underlying revenue growth, combined with cost optimisation strategies has resulted in EBITDA growth and strong pre-dividend free cashflow generation to comfortably meet debt obligations. The group continues to maintain a relatively low leverage position with funds from operations (FFO) adjusted net leverage of 0.6x in 2013. Fitch expects this may rise to around to 1.0x in 2016 as growing EBITDA is offset by higher tax and capex and higher dividend payments to minorities as well as MTN shareholders. However, this is still well within the leverage thresholds for a ‘BBB’ rating.

Consolidation Trends and M&A Risk
MTN’s 22 operations across Middle East and Africa, many with strong local market positions, give the group significant scale benefits that can be used to absorb competitive and regulatory pressures. In the event of any in-country consolidation, the sustainability of MTN’s competitive position will be important in maintaining its solid operating profile.

We expect that the group will continue to pursue acquisitions (with a number of smaller deals being concluded in FY13 and 1H14). MTN has sufficient flexibility to finance smaller bolt-on acquisitions. Any larger transactions which may negatively impact credit metrics would be treated as event risk and would be analysed on a case-by-case basis.

Limited FX Mismatch
MTN’s debt raised at all levels is largely issued in local currency to match the underlying cash flows of the group. MTN’s largest ‘hard currency’ exposure is to the US dollar (18% of total debt of ZAR46bn), which is partly matched through cash in US dollars maintained at the holding company level as well as operations in countries which use the CFA franc, which is pegged to the euro.

RATING SENSITIVITIES
Negative:
– Consolidated FFO adjusted net leverage sustainably above 2.5x (2013: 0.6x).
– If consolidated leverage approaches this threshold, net debt/EBITDA at material operating subsidiaries (most notably 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 of leverage of the South Africa operations (including the parent company). On an unconsolidated basis and using Fitch’s estimate of dividends received from these OpCos, net debt / EBITDA plus dividends for South Africa including the parent company over 2.5x (2013: estimated at 0.5x) would put pressure on the ratings.

Positive:
– Positive rating action is unlikely in the short term, due to MTN’s significant exposure to countries with a high degree of political and regulatory risk

FULL LIST OF RATING ACTIONS

MTN Group Limited
Long-term IDR: affirmed at ‘BBB’, Outlook Stable
National Long-term Rating: affirmed at ‘AA-(zaf), Outlook Stable
National Short-term Rating: affirmed at ‘F1+(zaf)’

MTN Holdings (Pty) Limited
Senior unsecured rating: affirmed ‘AA-(zaf)’