S&P Downgrades Cell C on Liquidity Concerns

The agency said it has taken longer than expected for Cell C to execute financing agreements for 2018-2019 growth capital expenditures and a short-term debt maturity, leading it to regard the company's liquidity position as more vulnerable.

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Cell C Head Office
Cell C Head Office (Photo Credit: archibuild.businesscatalyst.com)

South Africa’s third biggest mobile operator, Cell C, has been downgraded on liquidity concerns, Standard & Poor’s (S&P) Global Ratings has said in a statement.

The rating agency downgraded Cell C to CCC+’ from ‘B-‘ and lowering our issue ratings on its senior secured notes to ‘B-‘ from ‘B’.

The agency said it has taken longer than expected for Cell C to execute financing agreements for 2018-2019 growth capital expenditures and a short-term debt maturity, leading it to regard the company’s liquidity position as more vulnerable.

“Although Cell C’s performance has been in line with expectations to date, the company’s capital expenditure plan, despite creating growth prospects in the longer term, leads us to expect negative free cash flow of about R3.1 billion over 2018-2019,” the ratings firm said in a statement.

“While, to date, Cell C has secured short-term trade finance facilities of around R900 million, it has not secured substantial new liquidity sources with tenors exceeding 12 months, prompting us to reassess its liquidity to weak from adequate. We base our reassessment on our estimate that contracted sources of liquidity will cover uses of liquidity by less than 1x over the 12 months started March 31, 2018.”

The S&P downgrade comes just weeks after Cell C announced it was turning the corner.

In February, Cell C reported a net profit of R4.1 billion for the year to end-December 2017, reflecting a 660% rise, benefiting from a once-off gain of R4.1 billion arising from the recapitalisation transaction.

The aim of the transaction was to generate a healthy and sustainable balance sheet for the business and combined with the turnaround strategy, this has been accomplished. The restructuring involved Net 1 and Blue Label Telecoms.

Cell C’s liquidity uses include expected capex of around R3.7 billion, on a reported basis, in both 2018 and 2019. “We also include in our calculations the maturity of a R740 million capex financing facility, provided by Blue Label Telecoms, which is repayable on July 31, 2018,” a statement by S&P said.

Cell C’s business risk profile remains constrained by its relatively weak market position, given the company’s No. 3 position in South Africa’s mature four-player mobile telephony market.

“We understand that Cell C’s strategy targets continued investment in its network in urban areas, development of additional revenue streams, and improvements to its distribution network and customer service to increase market share by subscribers in the coming years toward 20%, from the current 18%.” the agency said.

“Still, with leading competitors MTN Group and Vodacom Group, Cell C – and, to a lesser extent, No. 4 player Telkom Mobile – will likely face challenges trying to achieve competitive scale and profitability.”

“We could revise our outlook to stable if Cell C secures liquidity to refinance the R740 million maturity due in third-quarter 2018, and markedly improves liquidity certainty for the next 12-18 months. Furthermore, we could raise the ratings if Cell C secures financing for the next two years, and its operational and financial performance are in line with or exceed our forecasts.”

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