Lagos, 30 July 2020 — Global Credit Ratings has affirmed the national scale long term and short term Issuer ratings of AA(NG) and A1+(NG) respectively assigned to MTN Nigeria Communications Plc, with the outlook accorded as Stable. The ratings are valid until June 2021.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to MTN Nigeria Communications Plc (“MTN Nigeria or the Company”) based on the following key criteria:
MTN Nigeria is the leading provider of cellular telecommunications services in Nigeria, accounting for 39.6% of the Nigerian GSM subscriber base, based on Nigerian Communications Commission’s statistics as of May 2020. Besides voice telephony, MTN Nigeria provides communication and network backbone to industries across the economy. The Company’s well established brand, substantive infrastructural economies and broad spectrum of licenses are positively considered.
The Company is a subsidiary of MTN International (Mauritius) Limited, with the ultimate parent company being South Africa based MTN Group Limited (“MTN” or “the Group). MTN Nigeria is viewed to be operationally integral to the Group, with cognisance taken of its contribution to the combined subscriber base and representation of approximately a third of MTN’s revenue and EBITDA. Accordingly, and in view of the extensive investment by the Group into the territory, GCR has factored in strong implied support from MTN into the ratings.
The telecommunications industry exhibits relatively low earnings cyclicality through the cycle, with favourable demographics supportive of relatively stable core earnings and cash flows. The Company’s position is protected by the number of licences accorded and generally extensive regulation, as well as substantial capital requirements. That said, MTN Nigeria has been subject to substantial fines in recent years, and thus regulatory scrutiny remains a key downside risk. GCR will continue to monitor the Company’s enhanced enterprise risk protocols, which are designed to mitigate regulatory compliance risk.
MTN Nigeria has demonstrated sustained earnings progression in recent years, with EBITDA registering at a new high of N629bn in FY19. That said, margins are expected to continue to trend below levels achieved prior to FY15, due to the adoption of the tower and base transceiver site lease model and significant imported inflation in capital costs. While further Naira devaluation is set to increase operating and funding cost pressures, MTN Nigeria’s margins are expected to remain relatively defensive over the rating horizon.
The Company continues to report sound cash flows, which have covered operational and capital requirements in most years. However, the high dividend pay-out ratio constrains the financial profile somewhat, and will have to be proactively reviewed to take account of projected domestic expansionary capital needs to mitigate funding and liquidity risk.
While on-balance sheet debt has risen sharply, this was largely due to the recognition of operating leases (FY19: N500bn), which GCR historically recognised as a substantial ongoing operating commitment. Additional Naira syndicated loans drawn down and commercial paper (CP) issued also saw interest bearing debt climb to N929.1bn at FY19. Nevertheless, earnings-based gearing has remained fairly conservative at 1.3x (1Q FY20: 1.1x). In the short-term, we expect downside pressure on gearing to come from a rollout of planned capex, exacerbated by COVID-19 related pressure on earnings and cash flows.
While cash flow cover of debt remains adequate, interest cover in the 3.0x-5.0x range is relatively low, implying constrained headroom to leverage operations further. In order to improve debt service, MTN Nigeria is thus expected to leverage medium term capital projects conservatively, using competitively priced term debt and internal cash resources.
The reduction in foreign currency debt, limited short-term debt maturities and strong access to capital bode positively, with capital provided by a consortium of local and foreign banks, as well as development finance institutions. Committed and unutilised facilities currently cover short-term debt 1.2x, but increased utilisation of commercial paper would significantly constrain the liquidity assessment.
Positive rating movement is contingent on a strong earnings growth and cash retention, supportive of low gearing metrics through the expansionary capex phase. Conversely, downward ratings pressure could arise from: 1) CP exposures that are not covered by undrawn, committed facilities 2) higher than anticipated gearing, exacerbated by high dividend pay-outs and unduly elevated capex, and 3) materially adverse socio-political or regulatory developments.
NATIONAL SCALE RATINGS HISTORY
|Issuer – Long term||AA(NG)||Stable||June 2019|
|Issuer – Short term||A1+(NG)||Stable||June 2019|
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Glossary of Terms/Ratios (February 2018)
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings 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, security or financial instrument; and d.) the ratings are valid until June 2021.
MTN Nigeria Communications Plc participated in the rating process via face-to-face management meetings, 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 MTN Nigeria Communications Plc
The information received from MTN Nigeria Communications Plc and other reliable third parties to accord the credit rating included:
– 2015-2019 audited annual financial statements,
– three-month unaudited management accounts to 31 March 2020,
– enterprise risk management framework,
– a breakdown of facilities available and related counterparties as at 31 March 2020,
– a completed rating questionnaire.
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.