S&P: Mobile Tower Company IHS Netherlands HoldCo B. V. Assigned Preliminary 'B+' Ratings; Outlook Stable
We also assigned our preliminary 'B+' issue rating to the proposed $800 million bond to be issued by IHS Netherlands.
Final ratings will depend on our receipt and satisfactory of final documentation of the bond issue and terms and conditions of new commercial debt. Accordingly, the preliminary ratings should not be construed as evidenceof final ratings. If S&P Global Ratings does not receive final documentation within a reasonable time frame, or if final documentation departs from materials reviewed, we reserve the right to withdraw or revise our ratings. Potential changes include, but are not limited to, utilization of bonds and new commercial debt, maturity, size and conditions of bonds, commercial loans and shareholder loans, financial covenants, and security.
IHS Netherlands is a newly set up subsidiary of Africa-focused mobile tower infrastructure company IHS Holding Ltd. (IHS Holding). In our opinion, the preliminary rating on IHS Netherlands is supported by our assessment that it is a core subsidiary of its parent IHS Holding, the largest independent mobiletower infrastructure operator in Africa. The preliminary rating on IHS Netherlands also reflects our view of the company's exposure to the very high country risk in Nigeria and that it will have negative free operating cash flow (FOCF) in 2016-2017, but this is offset by robust operating margins and declining leverage. We also note the company's leading market position and sound growth opportunities in Nigeria.
IHS Netherlands is the direct parent of existing operating companies IHS Nigeria Ltd. and Helios Towers Nigeria Ltd. (the latter entity now renamed IHSTowers NG Ltd.). The two entities collectively operate exclusively in Nigeria as one operation. IHS Nigeria has been one of the key operating companies in the IHS Holding group since inception, while Helios Towers Nigeria was acquired by IHS Holding in second-quarter 2016 and has been fully integrated.
Our assessment of IHS Netherlands' business risk profile is primarily constrained by the very high country risk in Nigeria. The currently low oil price environment has been a drag on the economy, and the Central Bank of Nigeria's (CBN's) strict foreign exchange controls are constraining manufacturing and trade, fueling a parallel market in foreign exchange. In addition, the CBN's controls undermine the corporate and banking sectors' foreign currency liquidity.
These weaknesses are partly offset by IHS Netherlands' 29% market share in theNigeria independent tower operator market. The company also enjoys a significant scope for growth in Nigeria due to the country's large population and relatively lower mobile penetration rate. IHS Netherlands' operations havea good suite of customers and robust long-term lease agreements with frequent reset and indexation provisions that mitigate against foreign exchange volatility and high energy costs (a large component to ensure continued operations where there is intermittent electricity supply), respectively.
Our assessment of IHS Netherlands' financial risk profile is constrained by the company's current, but declining leverage, and projected negative FOCF in 2016 -2017, on the back of large capital expenditures (capex) to support expansion of the businesses. However, due to the robust nature of the long-term lease agreements, we anticipate that IHS Netherlands' leverage will improve given the company's financial policy and improved FOCF prospects. Under the proposed transaction, we understand that approximately $550 million of IHS Nigeria's commercial loans and $250 million of Helios Nigeria Towers' senior unsecured notes will be refinanced.
Under our base case for IHS Netherlands for 2017-2018, we assume:
Nigerian GDP to contract by 1% in 2016 and rise by 2% in 2017.
Continued growth in Nigerian mobile demand due to low mobile penetration and supportive demand for increased base station capacity.
Organic growth of 41% in 2017 and 24% in 2018.
Adjusted EBITDA margin of 63% and 66% in 2017 and 2018, respectively.
Capex of $350 million and $110 million in 2017 and 2018, respectively.
Issuance of $800 million senior secured notes in 2016 to refinance existing debt in IHS Nigeria and Helios Towers Nigeria.
No dividend over the forecast period
Based on these assumptions, we arrive at the following credit measures:
Adjusted debt to EBITDA of 4.2x and 3.1x in 2017 and 2018, respectively.
Adjusted funds from operations (FFO) to debt of 13% and 19% in 2017 and 2018, respectively.
Significant negative free cash flow of about $0.2 billion in 2017 but becoming positive in 2018.
We consider IHS Netherlands' liquidity to be less than adequate, based on our estimate that the ratio of liquidity sources to uses for the next 12 months started June 30, 2016, will be below 1.2x. We understand that IHS Holding would provide liquidity support to IHS Netherlands, if needed.
We note that access to U. S. dollar liquidity in Nigeria has been challenging, but we believe that the monetary authorities in Nigeria have prioritized access to U. S. dollar liquidity for capital and interest of foreign-currency denominated debt. Based on the growth phase of IHS Netherlands' operating companies, it unlikely that there will be demand for discretionary repatriation of funds from Nigeria for the medium term.
For the 12 months started June 30, 2016, we calculate the following principal liquidity sources:
Cash and liquid investments of about $87 million.
Access to undrawn committed facilities with maturity greater than a year of $150 million.
Expected average cash FFO of $100 million.
A new $120 million revolving credit facility available to IHS Holding is not included in IHS Netherlands' liquidity calculation.
For the same period, we calculate the following principal liquidity uses:
Capex of $275 million.
Debt maturities of about $50 million.
OTHER CREDIT CONSIDERATIONS
We believe that IHS Holding has a stronger credit profile than IHS Netherlands--thanks to its large scale operations, better geographic diversity, stronger credit ratios, and a healthy liquidity profile--despite its high exposure to high risk countries and projected negative FOCF in 2016 -2017 due to capex investment. However, our assessment of IHS Holding's business risk profile is constrained by the very high country risk in Nigeria, where it derives most of its revenues.
We view IHS Netherlands as core for the group as it contributes a substantial amount to group EBITDA. We acknowledge the financial support given historically by IHS Holding to its key subsidiaries, the strong branding and reputational ties that will be formed between IHS Netherlands and its parent, and the importance of the Nigeria-based operations to IHS Holding. As such, our view of IHS Netherlands' creditworthiness is in line with our opinion of IHS Holding's credit profile.
RATING ABOVE THE SOVEREIGN
Our credit assessment on the IHS Holding group is higher than the foreign currency rating on Nigeria (B/Stable/B) because IHS Holding passes our hypothetical sovereign default stress test, which, among other factors, assumes a 50% devaluation of the Nigerian naira against hard currencies and a 15%-20% decline in organic EBITDA.
Currently, our credit assessment on IHS Holding can exceed the sovereign rating by only one notch. This is because of the parent's ability to raise financing outside Nigeria and the fact that most of its cash holdings is in hard currencies in other jurisdictions. Additionally, our credit assessment onIHS Holding is capped at one notch above our transfer and convertibility (T&C)assessment for Nigeria, which reflects S&P Global Ratings' view of the likelihood of a sovereign restricting corporations' access to foreign exchangeneeded to satisfy their debt service obligations.
The stable outlook on IHS Netherlands reflects that on the sovereign rating aswell as our current T&C assessment on Nigeria. Furthermore, the outlook reflects our view that IHS Holding will maintain a stronger credit profile than IHS Netherlands and an adequate liquidity profile. We also take into account our opinion that IHS Holding can be rated one notch higher than Nigeria.
We could lower the preliminary rating on IHS Netherlands if we downgraded Nigeria. In addition, we could lower the preliminary rating if we no longer assess that our rating on IHS Holding can exceed the sovereign rating by one notch, which could be the result of less cash reserves in hard currencies or limitation in accessing external financing. Furthermore, we could lower the rating if IHS Holding's liquidity was less than adequate or if its leverage would be higher than expected under our base case.
There is no rating upside given our sovereign rating on Nigeria and our current T&C and country risk assessments.