Telecom Namibia’s credit rating drops

Mergers, Acquisitions and Financial Results

The global rating agency, Fitch Ratings, has downgraded Telecom Namibia’s credit worthiness from stable to negative. Last week Fitch announced that Telecom’s long-term local currency Issuer Default Rating (IDR) of ‘BBB-’ and its National Long-term rating of ‘A (zaf)’ have both been revised to negative from stable.

According to the agency, the negative outlook reflects the potential for a weakening in the previous strong support and strategic linkage between the Namibian sovereign government and Telecom.  In order to mitigate the perceived threat of mobile broadband substitution, Fitch expects Telecom to increase investment in mobile infrastructure but that may not be matched by a commensurate increase in revenues due to strong competition from rival state-owned entity, MTC. Ultimately this could lead to margin compression, weaker cash flow generation and higher leverage.

In order to stabilize the rating Fitch expects to see greater tangible support for Telecom from the Namibian government.  The agency notes that the entity’s standalone ratings would be below the current support driven rating level as a fixed line incumbent benefits from a monopoly position. However, the domestic fixed line market has matured and growth is likely to remain muted over the medium term due to on-going revenue pressure in the voice segment.

Data and Internet Protocol (IP) related services saw increased revenue growth of 8.3% last year. Fitch believes that increased revenue from broadband products with the benefits provided by the participation in the West Africa Cable System (WACS) could offset revenue pressure in the mature voice market over the medium term. However, the participation by MTC in WACS is likely to increase competition through mobile broadband substitution.

Fitch believes that successful execution of the broadband growth strategy and managing key operating costs such as international bandwidth costs could provide a steady performance over the medium term. Telecom Namibia has a bond of N$347million outstanding which is scheduled to mature in 2015. In Fitch’s opinion, the investments in mobile network, service and related high execution risk in rolling out the business, increases the overall group’s liquidity risk.