Moody's Investors Service ("Moody's") has today confirmed MTN Group Limited's (JSE:MTN, GSE:MTNGH) Ba1 corporate family rating (CFR), Ba1-PD probability of default rating (PDR) and the Aa3.za national scale corporate family rating. Moody's has also confirmed the Ba1 rating on all the senior unsecured notes issued by MTN (Mauritius) Investments Limited. The rating outlook is negative.
This action follows MTN's announcement on 24 December 2018 that MTN Nigeria's regulatory dispute with the Central Bank of Nigeria (CBN) has reached an equitable resolution. This rating action concludes the review for downgrade initiated on 6 September 2018.
RATINGS RATIONALE
Moody's has today confirmed MTN Group's Ba1 ratings following MTN's announcement that it has reached a settlement with respect to allegations by the CBN on MTN Nigeria's improper repatriation of $8.1 billion between 2007 and 2015. The resolution involves MTN Nigeria paying $52.6 million to CBN without admission of liability and CBN regularizing all disputed Certificates of Capital Importation (CCI). This settlement removes uncertainty and substantially reduces the downside risk to MTN's credit profile. There are no other conditions attached to the settlement and the $52.6 million has been paid by MTN Nigeria's internal cash sources. Moody's understands that MTN Nigeria has had no other adverse impact either financially or operationally from recent events.
A degree of event risk however still remains, since the $2 billion tax dispute with the Nigerian Attorney General (NAG) is outstanding. MTN Nigeria's internal assessment is that it has paid $700 million in taxes over the disputed period and that there is no shortfall in payments. A court hearing is scheduled for 7 February 2019 in the Nigeria High Court.
Recent developments indicate heightened regulatory risk in Nigeria (B2 stable) for MTN, which is a key market for the Group and contributing one-third of group EBITDA for the last 12 months (LTM) ending 30 June 2018. The negative outlook reflects that downside risks may persist over the near time. This is exacerbated by limited visibility into the institutional decision-making in Nigeria that has led to recent allegations against MTN. There is uncertainty around the timing for any resolution related with the NAG matter, and general elections in Nigeria slated for 16 February 2019 and a transition to potentially a new government may create delays to a resolution.
MTN currently has sufficient liquidity to repay approaching debt maturities over the next 12 to 18 months with the next sizable refinancing wall only in 2021. There is also sufficient covenant headroom under its revolving credit facilities, with the tightest being leverage ratio covenant (consolidated total net borrowings/adjusted consolidated EBITDA) at 1.6x as of 30 June 2018 compared to a threshold of 2.5x. Moody's adjusted consolidated debt/EBITDA stood at 3.0x as of 30 June 2018 (LTM) and is forecasted to be 2.8x for 2018YE.
NEGATIVE OUTLOOK
The negative outlook reflects Moody's view that MTN is currently exposed to heightened regulatory event risks in Nigeria. There is uncertainty around whether this is a temporary situation or a more permanent part of the domestic operating environment.
Moody's guidance for a rating downgrade includes consolidated debt/EBITDA trending towards the 3.5x level, which Moody's forecasts will unlikely be reached even in a scenario where MTN Nigeria is required to pay a substantial amount as part of the tax dispute. Nevertheless, such an event could signal a higher degree of regulatory risk in Nigeria than what is currently incorporated in the Ba1 rating. Moody's will continue to monitor developments in Nigeria, which will shape its view on the ratings.
WHAT COULD CHANGE THE RATING UP / DOWN
In the absence of improving sovereign ratings within the major markets in which MTN operates (such as South Africa, Nigeria and Ghana), MTN's ratings are unlikely to be upgraded to Baa3. However, Moody's would consider an upgrade if MTN re-establishes a track record of dividends being up-streamed from key markets such that total debt to EBITDA on a consolidated or at MTN Holdings level were to trend towards 1.5x and MTN's consolidated EBITDA margin was on an improving trend. MTN Holdings is the holding company under MTN Group which directly or indirectly is the shareholder of all of MTN's operating companies.
The ratings could be downgraded following (1) lower up-streaming of hard-currency dividends or cash flows from MTN's non-South African operations which might result in higher leverage and weaker liquidity developing over time at the MTN Holdings level; or (2) weakening of sovereign ratings or greater degree of regulatory risk in key markets.
Quantitatively, downward pressure would arise if MTN's consolidated EBITDA margin was sustained below 35% and/or total debt to EBITDA on a consolidated basis or in MTN Nigeria or MTN South Africa or at MTN Holdings level were to trend towards 3.5x.
LIST OF AFFECTED RATINGS
Confirmations:
..Issuer: MTN Group Limited
.... Probability of Default Rating, Confirmed at Ba1-PD
.... Corporate Family Rating, Confirmed at Ba1
.... NSR Corporate Family Rating, Confirmed at Aa3.za
..Issuer: MTN (Mauritius) Investments Limited
....BACKED Senior Unsecured Regular Bond/Debenture, Confirmed at Ba1
Outlook Actions:
..Issuer: MTN Group Limited
....Outlook, Changed To Negative From Rating Under Review
..Issuer: MTN (Mauritius) Investments Limited
....Outlook, Changed To Negative From Rating Under Review
