Exposure to Overseas Markets Dampens MTN's Debt Ratings

Fitch Ratings has downgraded MTN Group's National Long-Term Rating to 'AA-(zaf)' from 'AA(zaf)' but the Outlook is Stable.

Fitch has affirmed the National Short-Term Rating at 'F1+(zaf)'.

Fitch said that the downgrade reflects the group's heightened business risk profile as a result of its growing reliance on cash generated from weak non-investment grade countries.

The Stable Outlook reflects the group's on-going strong cash generation and conservative leverage metrics.

Fitch expects MTN's fund from operations (FFO) lease-adjusted leverage to trend at or below 1.5x over the short to medium term. In addition, they also project pre-dividend free cash flow to sales to improve following two years of network investment in Nigeria and trending higher than 8%over the short to medium term.

This provides MTN with an adequate level of financial flexibility to enable the group to spend on network quality and coverage and thus retain its all-important leading market shares.

Fitch says that MTN's business risk profile is heightened through its operational exposure to non-investment grade countries.

In particular the group's largest contributor of cash flow is Nigeria, which comprises 38% of consolidated EBITDA.

While such countries typically have good mobile prospects given low mobile penetration rates and non-existent fixed line infrastructure, the operations are susceptible to political instability and unpredictable regulatory authorities.

With mobile penetration rates in South Africa now well in excess of 100% in addition to intensifying competition, the slowdown in the group's South African operations will place increasing reliance on cash flow growth from non-South African operations to service debt at the Holding Company (HoldCo) level.

Fitch expect some in-market consolidation to occur in markets such as South Africa, but also across the continent, over the next three years. However, given the uncertain timing, they will treat this M&A risk on a per-event basis.

Fitch accepts that borrowing locally in African markets not only provides a currency hedge against locally generated cash flow, but also makes strategic sense from a group funding perspective.

However, Fitch highlights that with respect to the bondholders of MTN's South African debt, the cash flows from the group's non-South African operations are structurally subordinated given that MTN raises its funding on a non-recourse basis to HoldCo (MTN recently raised an additional USD1.8 billion in debt facilities on a non-recourse basis to fund capex in Nigeria).

However, Fitch said that it takes comfort from the fact that MTN has historically been successful in circulating cash to the Holdco. Currently the ratio of HoldCo gross debt to available upstreamed cash is much more conservative than the consolidated leverage metric but this ratio may deteriorate with further issuance of holding company debt.