Telecom Namibia's Debt Ratings Put on a Negative Outlook
Fitch Ratings has affirmed Telecom Namibia Long-term local currency debt rating at 'BBB-' and National Long-term rating of 'A(zaf)'. The Outlooks are Negative.
The affirmation continues to reflect the one notch differential of Telecom Namibia's ratings with those of the Namibian sovereign's local currency debt rating of 'BBB'/Stable. Under Fitch's parent and subsidiary rating linkage methodology, Telecom Namibia has legal, operational and strategic links with the state of Namibia, which has secured Telecom Namibia's debt in the past and provided financial guarantees.
The Negative Outlook signals Fitch's concern that the standalone credit profile is weakening and if this decline is severe, without early indications of support from the government, it may result in a multi-notch widening between Telecom Namibia and the Namibian government to reflect more imminent liquidity concerns.
In line with other Fitch rated state-owned Namibian entities, Telecom Namibia is rated on a top-down basis from its 100% shareholder, the Namibian government. Fitch assesses that Telecom Namibia's standalone rating would be significantly below the support-driven rating level and would otherwise be in the 'BB' stand-alone category. The group still benefits from perceived support from the Namibian government given its fixed-line incumbent status and strategic telecoms ownership links with West African Cable System's (WACS) sub-sea cable landing rights and usage as well as providing important network links to local government departments, schools and hospitals.
In November 2012 Telecom Namibia completed the planned purchase of Powercom Ltd trading as Leo, Namibia's struggling second mobile GSM player. In doing so Telecom Namibia announced final plans to ramp-up its GSM coverage, invest in nationwide LTE and push new bundled triple-play products to enterprise and consumers. Coinciding with the mobile investment Telecom Namibia plans to upgrade its fibre network taking fibre closer to the home. While necessary to be able to take advantage of the WACS cable landing and improve speeds to Namibian nationals and enterprise - the fibre to-the-x (Fttx) upgrade comes at an awkward time from a cash flow perspective.
With Telecom Namibia's plans to become a fixed-mobile convergence (FMC) player in Namibia the market is set to become significantly more competitive. MTC, the 64% government-owned mobile player with almost 90% of current mobile subscribers, is also rolling out fixed line infrastructure to compete with bundled offerings. The prospect for price discounting and lower margins in what amounts to a small population is real and potentially damaging to both entities. Under the FMC strategy Telecom Namibia has ambitious plans to win significant revenue market share of the Namibian mobile market by 2017. Fitch notes that this plan has marketing merit as Telecom Namibia is in a duopoly market and will benefit from a much stronger fixed line position but it is not without significant execution risk. Fitch also notes that precedent exists for a successful late state-owned entrant into a duopoly market e.g. UAE with Du.
Fitch view the up-front, short-term investment profile required to acquire and invest in Leo's GSM/LTE network as well as investment in an Fttx upgrade of its fixed-line as stretching the company's cash flow leverage. If revenue growth from the investment is slower than expected or the market more competitive, pressure will quickly grow on the companies leverage profile and ability to refinance its 2015 existing bond maturity. Fitch estimate funds from operations (FFO) adjusted net leverage could rise above 4x by 2015 implying benevolent bond markets or the support of the government by way of potential equity injections in order to protect its rating profile.