LONDON — Moody’s Investors Service, (“Moody’s”) has today affirmed Liquid Telecommunications Holdings Limited’s corporate family rating (CFR) of B1 and probability of default rating (PDR) of B1-PD. Concurrently, Moody’s has affirmed the B1 instrument rating on the US$730 million senior secured notes due 2022 issued by Liquid Telecommunications Financing plc. The rating outlook remains negative.
“The affirmation reflects the benefits of a diversified business across 13 African countries that have enabled Liquid Telecom to withstand a decline in financial performance from its Zimbabwe operations” says local market analyst and VP – Senior Analyst, Dion Bate. “While Liquid Telecom will continue to benefit from the strong demand for its telecommunication services across Africa, leverage and interest cover metrics remain susceptible to local currency fluctuations against the US dollar”, adds Mr Bate.
The affirmation of Liquid Telecom’s B1 CFR reflects the significant ramp up in revenues and EBITDA generated in South Africa over the last twelve months which has contributed to offset the challenges that the company faces in Zimbabwe as a result of the sharp depreciation of the local currency and difficulties in repatriating cash. The EBITDA contribution from Zimbabwe reduced to 14% in the last twelve months (LTM) ending 31 May 2020 from 32% in the 2019 fiscal year ending 28 February. This contribution is expected to reduce towards 5% in 2021 driven by the continued devaluation of the Zimbabwe currency (Real-Time Gross Settlement, “RTGS”) against the US dollar and growth from the rest of the operations.
The affirmation of the rating also reflects a decline in gross leverage excluding Zimbabwe. Moody’s adjusted debt to EBITDA fell to 4.3x in LTM May 2020 from 6.0x in fiscal 2019. This ratio is likely to trend towards 4.0x in 2021 which is a level appropriate for the B1 rating. Moody’s assesses the company’s leverage and liquidity excluding Zimbabwe because the difficulties in accessing US dollar and transferring cash out of the country continue and this cash flow cannot be reliably used to service debt. Including the EBITDA from Zimbabwe, gross leverage was 3.8x for LTM May 2020.
The strong performance from the South African operations during fiscal 2020 has resulted in the revenue contribution to the Group increasing to 53% as of LTM May 2020 from 40% in fiscal 2018. This is credit positive because South Africa (Ba1 negative) is rated higher than the bulk of the African countries in which Liquid Telecom operates. However, the company remains exposed to currency risk given the large currency mismatch between its local currency cash flows and US dollar debt obligations. Moody’s estimates that around 74% of the Group’s EBITDA is earned in local currencies, namely the South African rand (53% of consolidated EBITDA before eliminations), Zimbabwe RTGS $ (14%), and other local African currencies (7%). A depreciation of these local currencies against the US dollar, specifically the South African rand, will increase leverage and depress interest cover ratios beyond current levels.
In the context of the coronavirus outbreak, the operational impact for Liquid Telecom has been limited as the company is considered an essential service by governments across Africa and its operations have not been restricted by the lockdowns. Moody’s expect Liquid Telecom’s services will be one of the few beneficiaries of the pandemic because of the increased use of connectivity and data consumption as businesses evolve to remote working environments.
Liquid Telecom has adequate liquidity with unrestricted cash balances of around US$101.3 million (excluding Zimbabwe), which combined with access to the remaining $33 million undrawn revolving credit facility (RCF) and positive operating cash flows, is sufficient to service debt obligations and capex over the next 18 months. However, Moody’s note that there is a refinancing wall approaching in the next 2 years, with the $730 million senior secured notes maturing in July 2022. Moody’s understand from management that they are already investigating various funding options to refinance the bond, which may include issuing a combination of Rand and $ denominated debt in order to achieve a better currency match. While not expected to be breached, the RCF’s net debt/EBITDA covenant of 4.25x steps down in February 2021 to 3.75x, reducing the available headroom (LTM 31 May 2020 = 3.34x).
Liquid Telecom’s B1 CFR continues to reflect its (1) strong market position as the largest pan-African fibre network covering 13 countries across the central, eastern and southern African regions in addition to South Africa; (2) valuable high-capacity long-haul fibre network assets spanning over 70,000 km’s; (3) exposure to supportive industry dynamics, given the growing demand for carrier and enterprise broadband services across Africa; (4) prudently managed capital investment roll-out; and (5) long-standing contractual relationships with a blue-chip customer base with moderate customer concentration.
The rating is constrained by (1) Liquid Telecom’s presence in countries with high geo-political risk and weak institutional strength, as it is the case in Zimbabwe which continues to face currency weakness, hyperinflation and dollar illiquidity; (2) exposure to currency risks due to mismatch between local currency cash flows and dollar debt obligations; and (3) a track record of negative free cash flows due to significant investments made in its fibre network and data centres which we expect to reduce as future capital expenditure is aligned to operational cash flow generation.
The negative outlook reflects the macroeconomic challenges that South Africa and other African countries face and which have already triggered a depreciation of their currencies against the US dollar. This is likely to create some volatility in the company’s credit metrics as well as lead to a more challenging business environment. The outlook also reflects the approaching maturity of the outstanding bond in 2 years which would put pressure on the rating if not addressed in a timely manner.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody’s could downgrade the ratings if (1) Liquid Telecom’s liquidity profile deteriorates including a reduction in headroom under its financial covenants; (2) Moody’s adjusted debt to EBITDA (excluding EBITDA generated in Zimbabwe) increases above 5.5x; and (3) Zimbabwe cash flows become more material and the company cannot reliably use it to meet its financial obligations as a result of difficulties in repatriating funds out of Zimbabwe.
Upward rating pressure could develop if (1) the company develops a track record of sustainable positive free cash flow (FCF) generation with FCF/gross debt exceeding 5%; (2) gross debt / EBITDA trends below 3.5x; (3) currency risk is reduced; and (4) liquidity is good. All credit metrics are adjusted as per Moody’s standard definitions and adjustments.
The principal methodology used in these ratings was Communications Infrastructure Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1076924. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Mauritius, Liquid Telecom is a provider of bandwidth infrastructure and network neutral interconnection services. The company owns and operates over 70,000 fibre optic route kilometers across 13 central, eastern, southern African regions in addition to South Africa, five data centres (one of which is tier 3 and two that are being built to tier 3 standards) and satellite earth stations. For the 12 months ended 31 May 2020, Liquid Telecom’s reported revenue was $798 million and Moody’s-adjusted EBITDA was $235 million.