Lagos, 22 October, 2020 – Global Credit Rating Co. Limited has assigned a first-time long-term and short-term national scale Issuer ratings of BBB(NG) and A3(NG) respectively to Pan African Towers Limited, with a Stable outlook accorded. The ratings are valid until August 2021.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Pan African Towers Limited (“PAT” or the “Company”) based on the following key criteria:
PAT’s ratings reflect its inherent business strength, an experienced management team, the substantial imminent cash investment in the Company and the expectation for a timeous and successful roll out of an aggressive expansion plan in the short to medium term. Although much smaller than its dominant peers, PAT’s strong growth prospects are underpinned by the substantial telecom infrastructure deficiency in Nigeria. However, with a limited track record, this is contingent upon a successful execution of its expansion plans.
PAT’s business risk assessment is mitigated by low sectorial cyclicality (even amid COVID-19); strong regulatory support for local content; stable, long-term, contracted revenues; embedded annual lease escalations; with financially strong telecom counterparties. Accordingly, debtor risk is also low. This is somewhat counterbalanced by earnings concentration (c.80%) to two key tenants, albeit in line with the industry structure.
Revenue is primarily derived from lease charges for hosting transmission equipment of third-party telecom operators. Having witnessed strong revenue progression in the past 26 months, PAT is seeking to expand its market share and gain from economies of scale through the acquisition of existing towers from smaller players, thereby enlarging its lease portfolio.
The EBITDA margin has increased steadily over the review period, albeit still below the level reported by the dominant competitors. Specifically, as is typical of the industry, cost efficiencies are constrained by high and volatile diesel costs (c.50% of total cost), but PAT passes diesel-related cost escalations to its tenants. While the Company plans to significantly reverse this trend through more cost-effective alternative energy sources, efficiency gains will only manifest in the medium to long term. During this period, earnings margins will also be impacted by lower legacy tenancy rate from the proposed sites to be acquired.
To date, PAT has maintained a conservative gearing profile, with adjusted net debt to EBITDA at 118%. Although the company requires a substantial capital outlay for its planned rapid expansion, funding will remain weighted to investment inflows (USD52m expected), and around N25.4bn to be raised through InfraCredit Guaranteed Bonds over the next three years. Nevertheless, this will escalate PAT’s hitherto low leverage above 4.0x over the next two years, before moderating below 3.0x in FY23. While the relative predictability of earnings mitigates funding risk somewhat, gearing could spike further if there is any significant earnings underperformance. Besides, the Company evidences low liquidity coverage, with sources of funds barely covering uses over the 12-month period ending December 2020, and 0.8x over the next 24 months.
The successful and timeous implementation of expansion plans and significant ramp-up of earnings could lead to upward ratings migration. Failure to roll out growth plans, due (inter alia) to cost overruns, adverse foreign exchange movements, inability to close the planned fund raising, or other exogenous factors, would leave PAT in a weak competitive position. Higher than expected gearing and/or loss of key tenants could adversely impact the ratings
NATIONAL SCALE RATINGS HISTORY
|Issuer – Long term||BBB(NG)||Stable||October 2020|
|Issuer – Short term||A3(NG)||Stable||October 2020|
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2018
Glossary of Terms/Ratios (February 2018)
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity; d) the ratings expire in August 2021.
PAT participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Pan African Towers Limited.
The information received from PAT and other reliable third parties in according the credit rating included;
- 2019 audited annual financial statements (plus four years of comparative numbers),
- unaudited management accounts as at June 2020,
- long term financial forecasts,
- industry comparative data and regulatory framework,
- a breakdown of facilities available and related counterparties.
- Information specific to the rated entity and/or industry was also received
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.