Fitch Ratings has placed the ratings of MTN Group Limited (JSE:MTN, GSE:MTNGH), including the 'BB+' Issuer Default Rating (IDR), on Rating Watch Negative (RWN) following announcements that Nigerian authorities put forward USD10.1 billion of claims to the company related to alleged tax violations and illegal cash repatriations from the country.
The RWN reflects the risk of a potential spike in leverage and liquidity pressures if the company fails to resolve these disputes with the Nigerian government. The size of the claims is significant and exceeds MTN's total debt of USD6.7 billion at end-1H18. MTN has said that these allegations are without merit and will be challenging these claims.
There is considerable uncertainty surrounding the regulatory developments in Nigeria. The potential impact on MTN's credit profile is hard to predict. Under certain scenarios in our analysis, MTN's rating could be downgraded by one or more notches. A lack of visibility in Nigeria could lead us to increase the weight of the Nigerian operating environment in our overall assessment of MTN's rating.
The full list of rating actions is at the end of this release.
KEY RATING DRIVERS
Regulatory Pressures Increase: A wide range of possible outcomes could result from the government's allegations. The USD10.1 billion of claims from Nigeria comprise of USD8.1 billion from the Central Bank of Nigeria for an alleged illegal cash transfer from the country and USD2 billion from the Nigerian Attorney General for alleged tax violations. Subject to the amount of the final settlement and the payment terms, the company's leverage could increase significantly and liquidity and cash circulation ability could come under pressure.
Fitch views the tax claims less damaging for MTN's credit profile, as the Nigerian unit generates strong free cash flow that can be used for any potential claim payments. The claim from the Central Bank that USD8.1 billion should be returned to Nigeria could require MTN to seek funds at the South Africa holding company level and potentially increase leverage at other operating subsidiaries. The company has reiterated its commitment to stay in the Nigerian market.
Limited Leverage Headroom: Even if the regulatory claims in Nigeria are withdrawn, MTN has limited leverage headroom in 2019-2021 below its downgrade threshold of 3.0x FFO adjusted net leverage. MTN's leverage stood at 2.4x at the end of 2017. We expect it to increase to 2.7x in 2018 on the back of negative FX trends together with lower dividend contributions from Iran following the re-introduction of the US sanctions. A partial payment of these claims could likely lead to a breach of our leverage downgrade threshold of 3.0x, while a delay in resolving this matters could hamper the amount of dividends MTN Nigeria upstreams to MTN Group.
Solid Operational Performance: MTN reported strong organic revenue growth in its key markets of South Africa (+3.2% yoy), Nigeria (+16.9% yoy) and Ghana (+27.9% yoy) in 1H18. These countries together account for around 70% of group's revenue and more than 75% of EBITDA for that period. Smaller markets, which each contribute around 1%-5% to revenue, demonstrated mixed performance. The reported revenue and EBITDA numbers look notably weaker due to the depreciation of some local currencies against the South African rand.
FX Mismatch: Around half of total group debt was denominated in US dollars at end-2017, based on Fitch's estimates, while the majority of group cash flow is generated in rand, naira and other African currencies. This FX mismatch means that a strengthening dollar would potentially increase leverage. The company reports in South African rand (ZAR), and therefore its appreciation against other currencies of operations have a negative impact on reported revenue and EBITDA.
Challenges in Iran: The worsening of relationships between Iran and the US and the reintroduction of economic sanctions will likely limit MTN's ability to receive dividends from its joint venture. This will put additional pressure on FFO from 2019. MTN was able to extract substantial dividends from Iran, of ZAR6.5 billion in 2017 and ZAR1.3 billion in 1H18. Fitch includes the dividends from associates in its FFO-based metrics calculation.
DERIVATION SUMMARY
MTN's operating profile compares well relative to Ooredoo (on a stand-alone basis), Bharti and VEON considering its strong geographic diversification and market-leading position in a majority of its markets. The group's profitability remains high for the sector, reflecting its operating profile strength. These strengths are offset by the lack of regional stability in some markets (Nigeria, Syria) and accompanying regulatory risks in these regions. Continued weakness in the macroeconomic and operating environments of MTN's main operating subsidiaries could negatively impact MTN's rating. No parent/subsidiary aspects affect the rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Low-single digit organic revenue growth rates in South Africa in 2019-2021
- Mid-double digit organic revenue growth rates in Nigeria and Ghana in 2019-2021
- Group EBITDA margin at 34% in 2018 gradually improving to 37% by 2021
- Capex intensity at 20% of revenue in 2018 and gradually reducing afterwards
- Dividends of ZAR12.6 billion in 2018 and growing each year
- No dividends from Iran from 2019
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
- Positive rating action is unlikely until the disputes with the Nigerian authorities are resolved
Developments that May, Individually or Collectively, Lead to Negative Rating Action
- Negative rating action on the South African sovereign rating
- Consolidated funds from operations (FFO) adjusted net leverage sustainably above 3.0x
- Consolidated FFO adjusted net leverage approaching the 3.0x threshold, and net debt/EBITDA at material operating subsidiaries (most notably MTN Nigeria) approaching the group average would put pressure on the rating
- Pressure on operating cash flow in MTN's key markets driven by increased regulatory and competitive pressures or increased capital expenditure
- Expectations of a reduction in dividends received from the operating subsidiaries leading to an increase in leverage of the South Africa operations (including the group holding companies)
- On an unconsolidated basis and using Fitch's estimate of dividends received from these operating companies, net debt/EBITDA plus dividends for South Africa (including the group holding companies) over 3.0x would put pressure on the ratings
LIQUIDITY
Limited Liquidity: the company had ZAR13.4 billion of cash on the balance at end-1H18, which is almost equal to its short-term debt. In the short-term, liquidity should be supported by ZAR4.5 billion of proceeds received in September from the sale of its operations in Cyprus. Fitch's analysis of the company's liquidity does not include any available committed facilities that the company may have.
FULL LIST OF RATING ACTIONS
MTN Group Limited
- Long-Term Foreign-Currency IDR: 'BB+', placed on RWN;
- National Long-Term Rating: 'AA(zaf)', placed on RWN;
- National Short-Term Rating: 'F1+(zaf)', placed on RWN.
