October 6, 2020/Fitch Ratings
Fitch Ratings has revised IHS Netherlands Holdco B.V.‘s (IHS Netherlands) Outlook to Stable from Negative while affirming the Long-Term Issuer Default Rating (IDR) ‘B’ and the senior unsecured rating at ‘B’/’RR4’. A full list of rating actions is provided below.
The rating action follow the revision of the Outlook on Nigeria’s Long-Term Foreign-Currency (FC) IDR to Stable from Negative on 30 September 2020 (see “Fitch Revises Nigeria’s Outlook to Stable, Affirms at ‘B'”).
Related Link: Fitch Revises Nigeria’s Outlook to Stable, Affirms at ‘B’
Fitch’s assessment of the fundamental issuer-specific credit considerations is unchanged.
Key Rating Drivers
Sovereign Constraint: IHS Netherlands‘ ratings are constrained by the Nigerian Country Ceiling, which is aligned with the sovereign’s Long-Term FC IDR. This reflects that the group’s operations and customers are solely based in Nigeria. The revision of the Outlook on IHS Netherlands’ Long-Term IDR reflects the likely correlation of rating action with changes of the sovereign rating, assuming that the Country Ceiling continues to be aligned with the sovereign IDR.
Coronavirus Impact Manageable: IHS Netherlands continues to operate its towers across Nigeria with minimal disruption. Telecoms is deemed by the government to be an essential service and IHS Netherlands’ engineers are still able to maintain equipment at the group’s sites and support operators with network upgrades and coverage deployments. Demand for mobile voice and data services in Nigeria has increased during the crisis, underlining the importance of connectivity and longer-term growth prospects in a country with limited fixed broadband capability.
Material FX Exposure: Around 60% of the group’s revenue is linked to the US dollar. Payments are made in naira, with the US dollar component converted into naira for settlement at a fixed conversion rate for a stated period. The US dollar conversion rate was historically based on the Central Bank of Nigeria (CBN) exchange rate and depending on the contract resets after a period of three, six or 12 months. In July 2020, IHS Netherlands announced an agreement with MTN, the largest Nigerian mobile operator, where the reference rate would be the Nigerian Autonomous Foreign Exchange Rate (NAFEX); 9mobile, the 4th largest mobile operator in Nigeria, also uses the NAFEX rate as the reference rate. Naira payments received by IHS Netherlands are then converted into US dollars at the NAFEX rate for financial reporting purposes.
Limited FX Impact on EBITDA: A significant part of the group’s EBITDA is linked to the US dollar as most of the group’s operating costs are either naira-denominated or related to the cost of diesel, where there are some indexation components. 2Q20 adjusted EBITDA (as reported by the group) of USD165 million was stable compared to 1Q20 even with the average NAFEX rate increasing to NGN/USD 386 in 2Q20 from 367 in 1Q20. Capex is paid in naira, with around 60% linked to the US dollar.
Ongoing FX Uncertainty: IHS Netherlands benefits when the CBN and NAFEX rates converge, although this has less of an impact now that the majority of US dollar-linked revenue has the NAFEX rate as the reference rate. This benefit would reverse if the NAFEX rate weakens relative to the CBN rate, which cannot be ruled out with the significant economic uncertainty in Nigeria. A scarcity of dollars is another risk, which we are monitoring closely. IHS Netherlands needs to convert naira into US dollars to service debt at its holding company in the Netherlands.
Improved Liquidity: Liquidity improved in July following a successful USD150 million tap of the group’s existing senior unsecured notes. This extra cash is being held outside of Nigeria at the IHS Netherlands holding company. We believe IHS Holding Limited, the parent of IHS Netherlands, would provide liquidity support to the latter in the event of a delay in obtaining US dollars. The parent company has a USD225 million undrawn revolving credit facility (RCF) guaranteed by IHS Netherlands.
Leading Nigerian Tower Operator: IHS Netherlands is the leading tower company in Nigeria, with 16,499 towers (end-2019). This market position is protected by high barriers to entry, high switching costs, and the quality of the group’s service. Around 68% of all mobile towers in Nigeria are owned by independent tower infrastructure operators. The Nigerian market also features high independent tower company concentration, with IHS Netherlands and American Tower together owning over 88% of the towers held by independent tower companies. We estimate IHS Netherlands owns 68% of the towers held by independent tower companies, and 46% of the total towers in Nigeria.
No Notching for Parent Linkage: Despite IHS Netherlands’ strategic importance to IHS Holding Limited, the lack of parental guarantees for the Nigerian subsidiary’s debt and given that IHS Netherlands operates on a standalone basis, both legal and operational ties are deemed weak. As such, we do not apply any notching for parent and subsidiary linkage (PSL). Our PSL approach could change if we see a significant change in the parent’s dependency on the cash flow of IHS Netherlands.
Derivation Summary
IHS Netherlands’ ‘B’ rating is constrained by Nigeria’s Country Ceiling, reflecting the challenging macroeconomic operating environment. IHS Netherlands is well-positioned within the Nigerian tower market as it commands the number-one position within the largest telecoms market in Africa. Except for its weaker operating environment, IHS Netherlands shares some operating and financial characteristics with its investment-grade international peers, such as American Tower Corporation (BBB+/Stable), Cellnex Telecom S.A. (BBB-/Stable) and PT Profesional Telekomunikasi Indonesia (BBB/Stable).
The Recovery Rating of the debt instruments is capped at ‘RR4’ and limited to a 50% recovery rate due to country considerations.
Key Assumptions
Low- to mid-single digit revenue growth per year (pro-forma for the combination with INT Towers Limited in September 2019) in 2020-2022, driven by continued demand for mobile infrastructure, assuming no further devaluation of the naira;
Fitch-defined EBITDA margin of around 59% in 2020-2022;
Capex of around USD200 million per annum in 2020-2022; and
No dividends paid in 2020-2022.
Rating Sensitivities
IHS Netherlands
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– Upgrade of the Nigerian sovereign rating, together with funds from operations (FFO) net leverage below 5.5x (2020F: 2.6x) on a sustained basis, and FFO interest cover greater than 2.0x (2020F: 4.2x).
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– FFO net leverage above 6.5x on a sustained basis;
– FFO interest cover below 1.5x;
– Weak free cash flow due to limited EBITDA growth, higher capex and shareholder distributions, or adverse changes to the group’s regulatory or competitive environment;
– Liquidity risks, including challenges in moving cash out of Nigeria to IHS Holding to service offshore debt;
– Downgrade of the Nigerian sovereign rating.
Nigeria – Sovereign Rating
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– External Finances: Stronger resilience of external finances from a durable recovery in international reserves or resumption of current account surpluses, and exchange rate regime reform addressing Nigeria’s ongoing external vulnerability;
– Public Finances: Credible path to stronger mobilisation of domestic non-oil revenues;
– Macro: Stronger economic growth supporting a recovery in GDP per capita and a moderation in inflation towards the central bank’s target.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– External Finances: Significant intensification of external liquidity pressures, for example illustrated by a rapid drawdown in reserves or renewed downturn in oil prices;
– Public Finances: A sharp rise in general government debt/revenues from larger funding needs than our current projections or materialisation on the sovereign’s balance sheet of contingent liabilities from the broad public sector or the banking sector.
ESG Considerations
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies).
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
Liquidity and Debt Structure
Sufficient Liquidity: IHS Netherlands ended 2Q20 with USD162 million equivalent of cash, mostly in Nigeria, of which USD22 million was in US dollars. A tap issue of raised USD150 million, which is being held in cash outside of Nigeria. The business generates strong free cash flow and there are no upcoming debt payments over the next 12 months. The US dollar and naira credit facilities have amortising profiles but only after a two-year grace period.
Furthermore, Nigerian operations form a vital part of the IHS Group, strengthening our view that the parent will support the Nigerian entities’ liquidity if IHS Netherlands has difficulties taking money out of Nigeria to service its debt.
