Fitch Rates IHS Netherlands HoldCo 'B+(EXP)'; Outlook Stable
IHS Netherlands Holdco B. V. is issuing a USD800m senior unsecured bond, guaranteed jointly and severally by 100% owned operating subsidiaries, IHS Nigeria Limited (IHSN) and IHS Towers NG Limited (IHS Towers, formerly known as Helios Towers Nigeria Limited). Collectively these companies are the restricted group, owned ultimately by IHS Holding Limited (IHS Group), the mobile telecommunications infrastructure company operating around 23,000 towers across Africa.
IHSN will also enter into a Nigerian naira credit facility of up to USD150m equivalent. IHS Group has recently signed a USD120m revolving credit facility (RCF), which is guaranteed by the restricted group. These, together with the senior unsecured bond, will be used to refinance all existing debt at IHSN and IHS Towers as part of a financial transaction to create a new capital structure for the restricted group, including a conditional tender offer for IHS Towers' 2019 notes.
At the same time, Fitch has placed IHS Towers' 'B' Long-Term IDR and senior unsecured rating and 'A-(nga)' National Long-Term Rating on Rating Watch Positive (RWP). IHS Towers' ratings may be aligned with the rating of IHS Netherlands Holdco B. V. if the transaction is successfully completed as IHS Towers should benefit from being part of the restricted group.
The restricted group's senior unsecured notes and NGN credit facility will rank pari passu with any outstanding IHS Towers notes and the guarantee of the IHS Group's RCF, although outstanding IHS Towers notes will only have recourse to IHS Towers. The drawn amount of the RCF will be included in the calculation of the restricted group's credit metrics.
Final ratings are contingent on the successful completion of the transaction and the receipt of final documents conforming materially to the preliminary documentation Fitch has seen. A full list of rating actions is available below.
KEY RATING DRIVERS
Leading Nigerian Tower Operator
The restricted group is the leading tower company in Nigeria. Following recent in-country consolidation and tower sales by mobile operators, IHS Group controls just over 50% of all telecoms tower infrastructure in Nigeria. It has 6,351 towers through the fully owned subsidiaries of the restricted group and just over 9,000 towers through the 49/51 joint venture IHS Group has with MTN. The JV is managed by the restricted group, which has full operational control.
The towers represent over 70% of the towers in Nigeria not directly owned by telecoms operators. Even with further consolidation among the other tower owners, IHS Group should still retain its number one position. Glo is the only of the four main Nigerian mobile operators that has not sold its tower portfolio (around 6,000 towers) to independent tower companies.
Strong Underlying Demand
The restricted group is well placed to benefit from strong growth potential in Nigerian telecoms. We expect it to continue growing strongly in line with the telecommunications market in Nigeria, which is seeing strong demand for mobile services. With fixed-line population penetration of 0.1% in Nigeria in 2015, 3G and LTE networks are the main way of providing high-speed broadband connectivity.
We expect mobile operators to densify their networks to increase capacity as smartphone take up increases and as data traffic grows, resulting in growing demand for passive tower infrastructure over the next five years. The Nigerian telecoms regulator is focused on improving network quality. We believe that the regulator sees the shared use of towers as a way of increasing capital efficiency for network operators.
Strong Business Model
The market position of the restricted group is protected by high barriers to entry, switching costs, and the quality of its service. It benefits from a visible revenue stream driven by long-term lease agreements, which comprise embedded contractual escalators to mitigate inflation risk and, in some cases, cost pass-through mechanisms for power costs. The average length of the master agreements the restricted group has with its customers as of 30 June 2016 was 7.6 years.
We expect significant revenue growth in 2017 from contracted new tower builds, 3G/4G upgrades and as FX rates are reset from 1 January following the naira's devaluation in 2016. This will boost 2017 EBITDA with strong margin expansion, helped by continued energy efficiency gains. Free cash flow (FCF) is expected to be negative in 2017 due to significant expansion capex. We forecast FCF to turn positive in 2018 and grow strongly in the following years as capex falls and EBITDA growth continues.
Growth More Certain
IHSN signed an amendment effective July 2016 to its existing contract with MTN Nigeria. In this agreement, MTN has committed to provide IHSN with a portion of its intended network rollout of more than 11,200 sites in Nigeria by end-2017. This should result in IHSN gaining around 2,000 new 3G/LTE tenancies and 1,650 new build towers or co-locations by end-2017. This amount of new sites is significant considering that IHSN built 1,648 new sites from 2013 to 2015 and 96 in 1H16.
Limited FX Exposure
Seventy-eight per cent of the restricted group's revenue of 30 June 2016 was linked to the US dollar. Payments are made in Nigerian naira and the US dollar component is converted to naira for settlement at a fixed conversion rate for a stated period. Depending on the contract, the conversion rate is reset after a period of three, six or 12 months.
Even though the proportion of revenue linked to the US dollar is set to decline to 72% in 2018, the company aims to reduce its foreign exchange revenue exposure by moving more contracts to a three-month reset (48% of revenue in 2018 linked to the US dollar with a three-month rest by 2018, compared with 49% in 2016 linked to the US dollar with a 12-month reset). Of the 22% of revenue not linked to the US dollar, roughly half is linked to the naira, with the rest linked to the price of diesel, which is passed on to the customer.
Almost all of the company's EBITDA (51% of revenue in 2015 and 1H16, pro forma for the acquisition of IHS Towers) is linked to the US dollar. This is because most of the company's operating costs are either related to the cost of diesel, or in naira, offsetting the amount of revenue in naira and linked to the price of diesel. Capex is paid in naira, with elements linked to the US dollar.
Exposure to Diesel Price
The restricted group has some exposure to the cost of diesel as not all of energy costs are passed on to customers. However, the company is investing in more efficient generators and deploying power management solutions. As of end-June 2016, 1,296 sites have been upgraded, where diesel consumption per refurbished site has dropped by more than 50%. We expect overall diesel consumption to fall as power management solutions are deployed to more sites over the next two years. This should mitigate most of any reasonable increase in the cost of diesel.
Sovereign Rating Constraint
All of the restricted group's assets are based in Nigeria, which means the company is exposed to the risks associated with the Nigerian sovereign (B+/Stable). Even though the restricted group may have an operating and credit profile stronger than the 'B' category, its rating is constrained by the Nigerian Country Ceiling of 'B+'. Changes to the sovereign rating may lead to ratings changes for the restricted group.
IHS Towers Tender Offer
IHS Towers Netherlands FinCo NG B. V. (formerly known as Helios Towers Finance Netherlands B. V.) plans to buy all of IHS Towers' USD250m 8.375% notes due 2019 in a conditional tender offer. This will be funded by part of the proceeds of the issue of the restricted group's new notes. Any IHS Towers notes outstanding after the tender offer will rank pari passu with the restricted group's senior unsecured notes and IHSN's naira credit facility, as well as the guarantee of the IHS Group's USD120m RCF.
However, outstanding IHS Towers note holders will only have recourse to IHS Towers, rather than the entire restricted group. In a default scenario, this may result in potentially weaker recovery prospects for the IHS Towers notes than the restricted group's senior unsecured notes. We could align IHS Towers' ratings with the restricted group's 'B+(EXP)' rating if the proposed transaction is successfully completed.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for restricted group include:
- Revenue growth in USD of over 20% per year in 2017 and 2018, driven by the FX reset in early 2017 and strong underlying growth, assuming no major devaluation of the naira. Growth in 2019 is likely to be in the high single digit percentage range.
- EBITDA margin increasing to 60% in 2017 from 51% in 1H16, driven by the FX reset, strong revenue growth and continued cost efficiencies. EBITDA margin should rise slightly in 2018 and 2019.
- Capex-to-revenue of over 80% in 2017 as the company invests heavily in medium-term growth opportunity, mainly new build towers and upgrading power management systems. Capex intensity should fall to around 23% in 2018 and decline further in 2019.
- No dividends paid in 2017-2019.
- The company will need more financing in 2017 to fund capex if it pursues all investment opportunities as FCF is likely to be negative in 2017.
RATING SENSITIVITIES
IHS Netherlands Holdco B. V.
Future developments that may, individually or collectively, lead to negative rating action include:
- Funds from operations (FFO)-adjusted net leverage above 5.5x on a sustained basis (3.5x at end-2015)
- FFO fixed charge below 2.0x (2.6x at end-2015)
- Weak FCF due to limited EBITDA growth, higher capex and shareholder distributions, or adverse changes to the restricted group's regulatory or competitive environment
- Downgrade of the Nigerian sovereign rating
Future developments that may, individually or collectively, lead to positive rating action for include:
- Upgrade of the Nigerian sovereign rating, together with FFO-adjusted net leverage below 5.0x on a sustained basis, and FFO fixed charge cover greater than 2.5x
IHS Towers NG Limited
Future developments that may, individually or collectively, lead to the ratings being affirmed includes:
- The transaction not completing successfully as IHS Towers would not benefit from being incorporated into the larger pool of the restricted group's Nigerian assets.
Future developments that may, individually or collectively, lead to positive rating action for include:
- The successful completion of the transaction, which could result in IHS Towers' IDR and bond rating being upgraded to 'B+' and aligned to the restricted group's rating.
Nigeria - Sovereign rating:
Future developments that may, individually or collectively, lead to negative rating action include:
- A loss of foreign exchange reserves that increases vulnerability to external shocks
- Reversal of key structural reforms and anti-corruption and transparency measures
- Worsening of political and security risks that reduces oil production for a prolonged period or worsens ethnic or sectarian tension
- Failure to narrow the fiscal deficit leading to a marked increase in public debt
Future developments that may, individually or collectively, lead to positive rating action include:
- A rise in non-oil revenues that leads to a reduction of the fiscal deficit and the maintenance of a manageable debt burden
- A revival of economic growth supported by the sustained implementation of coherent macroeconomic policies
- Increase in foreign exchange reserves to a level that reduces vulnerability to external shocks
LIQUIDITY
On a pro forma basis taking into account the financial transaction, the restricted group had USD87m cash at end-1H16. Assuming that all existing debt is refinanced as part of the proposed transaction, the restricted group will only have its first debt repayment in 2018. Liquidity is likely to remain limited due to significant capex plans in 2017. The restricted group would need support from IHS Group, expected to be in the form of a shareholder loan, if the former wants to invest to take advantage of all medium-term growth opportunities.
FULL LIST OF RATING ACTIONS
IHS Netherlands Holdco B. V.
Long-Term IDR: 'B+(EXP)'; Outlook Stable
Senior unsecured rating: 'B+(EXP)'/'RR4'
National Long-Term Rating: 'AA(nga)(EXP)'; Outlook Stable
IHS Towers NG Limited
Long-Term IDR: 'B'; placed on Rating Watch Positive (RWP)
Senior unsecured rating: 'B'/'RR4'; placed on RWP
National Long-Term Rating: 'A-(nga)'; placed on RWP
IHS Towers Netherlands FinCo NG B. V.
Senior unsecured notes guaranteed by IHS Towers NG Limited and Tower Infrastructure Company Limited: 'B'/'RR4'; placed on RWP
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