Lagos, 27 September 2021 – GCR Ratings (“GCR”) has affirmed Pan African Towers Limited’s national scale long and short-term Issuer ratings of BBB(NG) and A3(NG) respectively, with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Pan African Towers Limited||Long Term Issuer||National||BBB (NG)||Stable|
|Short Term Issuer||A3(NG)|
Pan African Towers Limited’s (“PAT” or “the Company”) ratings are underpinned by the robust operating environment in the Nigerian telecommunication sector, which has supported strong revenue growth and firm profit margins. This is, however, set off against the Company’s high leverage, small market share and limited operational track record.
The robust telecommunications operating environment has been supportive of PAT’s operations, driving the growing demand for its tower and tenancy services. Low industry cyclicality, given the essential nature of the services being rendered, as well as favorable demographics and should continue to underpin strong prospects for the industry, and thus future demand for PAT’s tower infrastructure. Nevertheless, industry performance remains highly susceptible to technology disruptions.
PAT’s ratings are, however, constrained by weak competitive position. Despite achieving steady growth in its tower portfolio (FY20 c.1,000; FY18: 393) and tenancy (FY20 c.1,115; FY18: 637), PAT remains a small market player compared to ATC Nigeria and IHS Towers having 5,823 and 16,537 towers respectively in FY20. To expand the Company intends to complement its tower infrastructure services by diversifying into fibre optic network services and data centres, but it will remain comparatively small over the medium term, given the huge funding requirement to attain scale.
PAT has reported steady growth in earnings, with revenue rising from N2.9bn in FY18 to N8.2bn in FY20, underpinned by the strong industry demand and long-term contracts. The increase in scale has supported operating efficiencies, with EBITDA margin widening from 20.8% in FY18 to 43.8% in FY20. Given the pipeline of over 120 build-to-suit orders and lease escalation, GCR forecasts a 25% top line growth to N10.3bn in FY21 (with an annualised 47% achieved in 1H FY21) and further to N13.5bn in FY22. Higher operating efficiency is expected to support EBITDA margin to 50%-55% range in FY21-22 (albeit remaining below peer average).
The ratings are, however, constrained by the weak leverage metrics as expansion has been funded mainly by a rapid increase in debt. Gross debt climbed from N206m at FY18 to N23.9bn at FY20 as a result of which net debt to EBITDA spiked sharply to 612% in FY20 (FY19: 119%). Similarly, interest coverage fell to 2.9x in FY20 and further to 1.9x in 1H FY21 (FY19: 6.7x) due to the rise in finance cost, while negative operating cash flow (“OCF”) coverage of debt was reported in FY20 and 1H FY21 reflecting the significant working capital pressures amid rise in debt. Given the planned N10bn bond issue, we forecast that debt will rise further to N33bn in FY21 but expect gearing to moderate to the 400%-450% range supported by stronger earnings, while OCF to debt and interest coverage will remain weak below 10% and 1.5x in FY21-22. However, GCR considers PAT’s capital structure to reflect relatively low risk. This is because of the high proportion of debt provided by the ultimate parent (91%) and the long-term debt maturity profile, with N20bn extending to 2031.
The liquidity assessment is considered adequate for a company in a high growth phase. The Company had N1.8bn in cash at FY20, with a further N1bn in unutilised credit facilities, which is sufficient to meet PAT’s short-term debt redemption of N2.6bn. Whilst capex of N8bn is forecast for FY21 and FY22, this should be covered by the proposed N10bn secured bond issuance. Although the bond has yet to be placed, the likelihood of a successful issuance is factored into the assessment, given the role of the major shareholder and the guarantee the bond is likely to receive.
The Stable Outlook reflects GCR’s expectations that increasing revenue and widening earnings margins will be sufficient to meet increased debt service obligations and expansion costs.
Positive rating action is dependent on (1) significant growth in PAT’s tower portfolio (either organically or through acquisitions); (2) the attainment of medium-term plans to diversify into related market segments and (3) sustained growth in earnings resulting in net debt to EBITDA falling below 400% over the medium term and interest coverage being sustained around the 4x level.
Conversely, the ratings could be downgraded (1) due to PAT’s inability to issue the proposed bond or raise sufficient fund, which results in significant liquidity pressure, (2) if gearing metrics deteriorates materially due to further rise in debt amidst earnings underperformance, (3) if PAT loses key tenants.
|Primary analyst||Samuel Popoola||Analyst: Corporate and Public Sector|
|Lagos, Nigeria||Samuel@GCRratings.com||+234 1 904 9462|
|Committee chair||Eyal Shevel||Sector Head: Corporate and Public Sector Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Entities, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Nigeria Country Risk Scores, February 2021|
|GCR Nigeria Corporate Sector Risk Scores, August 2021|
Pan African Towers Limited
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Long Term Issuer||Initial||National||BBB(NG)||Stable||September 2020|
|Short Term Issuer||Initial||National||A3(NG)|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||3.50|
|Management and governance||0.00|
|Leverage and Cash flow||(1.75)|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with because of holding the security or asset. For a company, its exposure may relate to a product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|Leverage||Regarding corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Short Term||Current; ordinarily less than one year.|
Salient Points 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Pan African Towers Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Pan African Towers Limited participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Pan African Towers Limited and other reliable third parties to accord the credit ratings included:
- 2020 audited annual financial statement, and prior four years annual financial statements;
- management accounts for the period to 30 June 2021;
- Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
- Information specific to the rated entity and/or industry was also received;