Fitch Revises MTN Group Limited's Outlook to Negative; Affirms at 'BBB'
The Negative Outlook reflects the risk of a significant cash outflow due to a substantial fine imposed on MTN's Nigerian operations, which could increase leverage and pressure MTN's credit metrics. These developments in Nigeria highlight the risk MTN is exposed to in operating in a variety of emerging market countries.
KEY RATING DRIVERS
MTN has announced that NCC, the Nigerian telecoms regulator, has imposed a fine equivalent to USD5.2bn on MTN Nigeria. We understand that management remains in discussion with NCC as to the size and timing of the payment of the fine. If the fine is confirmed as initially announced by the group and is payable in the short term, it could result in negative rating action.
Reduced Dividends from MTN Nigeria
In MTN's 3Q15 results call, management highlighted the difficulties the group faces in remitting dividends from MTN Nigeria to the parent company. This is due to the Nigerian central bank's policy of maintaining the Naira peg to the US dollar, which is limiting foreign exchange liquidity. The liquidity squeeze arising from this has been short term. However, if there is no evidence of an improvement in liquidity from the Nigerian operations, it will result in negative rating pressure.
Emerging Market Risk Exposure
With strong growth in recent years, Nigeria now accounts for a larger proportion of MTN's profits. MTN Nigeria accounts for almost half of the group's EBITDA, and a greater proportion of its free cash flow. The fine in Nigeria underlines some of the wider risks associated with emerging markets from macroeconomic risks such as currency volatility to industry specific regulatory developments.
Adjustments to Dividend Policy
Given MTN's strong pre-dividend FCF generation, and the significant level of dividends paid (ZAR20.5bn in 2014), MTN has the option to alter its dividend policy to reduce leverage and manage its credit profile in the event the fine is enforced and leads to a material cash outflow. However, a significant reduction in dividends would be needed to offset a loss of dividends from Nigeria to ensure MTN's ability to service the debt at a holding company would be unimpaired.
Leading Market Position in Iran
The group has a leading market position in Iran with significant reserves that have not been remitted due to sanctions. There could be a significant dividend payment from operations in Iran on resumption of normal operations, even after taking into account further necessary capex investment. The timing and size of this payment to the holding company is not clear at this stage but could be positive for the rating in the next 12-18 months. Nonetheless, the restriction further emphasises the emerging market risk the overall group is increasingly exposed to.
Fitch's key assumptions within the rating case for MTN include:
- Low-single digit revenue and EBITDA CAGR from 2014-2018F.
- Capex to revenue of 21% in 2015, declining to 16% in 2018.
- Progressive dividends paid to MTN shareholders and minorities.
- Due to the significant uncertainty surrounding the Nigerian fine, the potential cash outflow has not been reflected in our base case, but in our scenario analysis.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Consolidated FFO adjusted net leverage sustainably above 2.5x (2013: 0.6x).
- If consolidated leverage approaches this threshold, net debt/EBITDA at material operating subsidiaries (most notably Nigeria) approaching the group average would put pressure on the rating.
- Pressure on operating cash flow in MTN's key markets driven by increased regulatory and competitive pressures or increased capital expenditure.
- Expectations of a reduction in dividends received from the operating subsidiaries that would lead to an increase of leverage of the South Africa operations (including the parent company). On an unconsolidated basis and using Fitch's estimate of dividends received from these OpCos, net debt / EBITDA plus dividends for South Africa including the parent company over 2.5x (2013: estimated at 0.5x) would put pressure on the ratings.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- The Outlook could be revised to Stable if MTN can manage its financial profile so that credit metrics stay firmly within the guidelines outlined above, and if the operating and regulatory environment in key markets remains stable and the situation in Nigeria improves.
- An upgrade is unlikely in the short term, due to MTN's significant exposure to countries with a high degree of political and regulatory risk
FULL LIST OF RATING ACTIONS
MTN Group Limited
Long-term IDR: affirmed at 'BBB', Outlook revised to Negative from Stable
National Long-term Rating: affirmed at 'AA-(zaf), Outlook revised to Negative from Stable
National Short-term Rating: affirmed at 'F1+(zaf)'
MTN Holdings (Pty) Limited
Senior unsecured rating: affirmed 'AA-(zaf)'.