Ratings agency S&P Global Ratings has downgraded South Africa’s third largest mobile operator Cell C to 'CCC-', with a developing outlook, on the back of considerable short-term liquidity and refinancing risks.
The mobile operator’s rating was lowered from ‘CCC+’ and ‘B-‘ on S&P’s issuer credit rating and senior secured bond, respectively, while the developing outlook reflects the possibility of the agency raising or lowering the rating in the next few quarters depending on Cell C's negotiations with the Buffet Consortium.
“Cell C's liquidity position continues to weaken, while refinancing risk has intensified because of upcoming debt maturities,” S&P said in a statement on Wednesday.
The ratings agency pointed out that R8.8-billion of Cell C’s R9-billion debt would mature within the next 18 months, while the telecommunications group remains largely free cash flow negative under normal working capital and capital expenditure (capex) conditions.
The Buffet Consortium’s plans to potentially become a minority shareholder could bolster Cell C's balance sheet and ensure its sustainability.
“Although refinancing options . . . linked to the [deal] . . . are on the table, the conditions, timing and outcome of such an arrangement remain uncertain.
“Excluding the potential impact of such a transaction, we forecast that Cell C's liquidity sources will cover its liquidity uses by materially less than 1x over the next 12 months,” S&P warned.
Cell C reported cash on hand of about R500-million as at December 31 and a committed vendor financing facility of $71-million, or about R1-billion.
The company's upcoming debt maturities in 2019 and 2020 include a R1.4-billion airtime backed facility due in July; about R3.8-billion of bank funding due in January and July 2020; a R2.6-billion senior secured bond due in August 2020; and a rolling R900-million handset financing facility.
“While the company generates sufficient earnings before interest, taxes, depreciation and amortisation to cover its cash interest costs, the high effective interest rates on its current borrowings and its unfunded capex profile lead us to assess its current capital structure as unsustainable,” S&P concluded.