GCR Places MTN Nigeria Rating on Negative Outlook
GCR Ratings has affirmed the national scale long-term and short-term issuer ratings of AAA (NG) and A1+(NG) respectively accorded to MTN Nigeria Communications Plc.
Simultaneously, GCR has affirmed the national scale long-term issue rating of AAA(NG) accorded to each of MTN Nigeria Communications Plc’s existing senior unsecured bond issues.
GCR said the outlook on the ratings is revised to negative, from stable previously. It added that the negative outlook reflects MTN Nigeria Communications high exposure to foreign currency (FX) risk, which has resulted in significant exchange losses and large net losses over the last 15 months.
The telecom company FX losses has led to a deterioration in leverage metrics and completely eroded shareholders equity.
“We believe that the company’s strong competitive position, robust earnings generation capacity and access to various funding sources are key rating supports and provide headroom to MTN Nigeria, but there is a likelihood of a downgrade in the near term if the financial challenges related to the USD denominated leases are not resolved”.
MTN Nigeria reported significant net foreign exchange loss of N740.4 billion in financial year 2023, ended 31 December 2023, and N656.4 billion in the interim results as of Q1 2024.
These losses followed the sharp Naira devaluation in 2023 and the consequential impact on the company’s foreign currency denominated debt, lease contracts, and other core operating support and maintenance contracts, GCR Ratings said.
Although, revenue growth has been maintained at an average of 22.4% over the three years to financial 2023, the earnings before interest tax depreciation and amortisation (EBITDA) margin declined to 48.9% in 2023, GCR stated.
EBITDA further decline to 39.1% in Q1 2024, reflecting the rising cost of inputs amidst the general inflationary pressures and Naira devaluation.
GCR said while operating profit remained positive, after accounting for the large unrealised FX losses, MTN Nigeria reported a net loss of N137.0 billion in 2023 and a N392.7 billion loss in Q1 2024, compared with N348.7 million profit in financial 2022.
“To mitigate these cost pressures and reduce FX exposures, the company plans to restructure the enormous FX exposures of the lease contracts and implement more stringent cost control initiatives”, GCR said.
GCR hints that MTN Nigeria is also engaging the regulator for higher tariff adjustments to strengthen revenue generation.
“While we anticipate revenue growth to remain above 20% over the outlook period, we expect cost pressures to persist and continue to constrain the EBITDA margin below historical levels.
“If FX issues are not resolved, earnings could be worse than anticipated and thus prejudicing a return to profitability over the next 12-18 months.
In the rating note, GCR said MTN Nigeria’s high FX losses have completely eroded its shareholders equity, resulting in a very weak capital structure.
Notwithstanding the weaker credit metrics, GCR Ratings said its assessment of the company’s leverage profile remains modest. MTN Nigeria gross debt including lease liabilities increased to N2.2 trillion in financial 2023 from N1.3 trillion in 2022.
It surged further to N2.5 trillion in March 2024, largely due to the adverse exchange rate movements as most of the company’s debt and lease agreements are denominated in US dollar.
GCR Ratings said the company’s leverage position was also pressured by high interest charges given the floating interest rate on a sizable portion of the entire debt.
Accordingly, net debt to earnings before interest tax depreciation and amortisation rose to 1.6x in March 2024 and operating cash flow coverage of debt moderated to 54.2% in 2023 from 69.6% in 2022.
The telecom company’s interest cover weakened to 3.3x in March 2024 from 5.7x in 2023, and 7.3x in 2022 due to higher finance costs arising from exchange rate fluctuations.
Despite the deterioration, GCR considers MTN Nigeria’s gearing metrics to be relatively strong, due to ongoing robust cash generation.
Moreover, the leverage assessment is supported by the company’s wide access to funding sources and favourable credit terms with suppliers, which provide some ability to absorb FX related losses.
However, the leverage and capital structure assessment could be much weaker if liabilities continue to climb due to FX movements, or if much of the unrealized losses begin to materialise in higher cash outflows.
“We note the company’s ongoing effort to deleverage its balance sheet, renegotiate lease contracts and refinance USD debt with local currency, indicated by the early settlement of USD174.0 million of its letters of credit in March 2024.
“Going forward, an improvement in leverage will depend on the company’s ability to significantly reprice contracts in Naira, and refinance or repay USD obligations”.
GCR Ratings stated that a meaningful improvement in earnings is necessary to bolster capital over the near to medium term.
“We have factored in group support to the ratings, given that MTN Nigeria is operationally integral to MTN Group Limited, and in view of the group’s extensive investment in Nigeria.
However, we note that MTN Nigeria’s current standalone credit profile is sufficient to be accorded the highest Nigeria national scale rating band”, GCR rating stated.
According to the rating note, MTN Nigeria has raised a cumulative N315 billion in bonds over the past three years under its two separate N200 billion programmes in series 1, series 2, series 1 tranche A and tranche B bonds issuances.
These bonds constitute direct, unconditional, senior, unsubordinated and unsecured obligations of MTN Nigeria and at all times rank pari passu and without any preference among themselves.
“We have reviewed the Trustee’s report and the transaction account bank statements dated 19 May 2024 and 7 June 2024 respectively, regarding the bonds performance and noted that MTN Nigeria has complied with the transaction terms and conditions in respect of the timing of payments as stipulated in the trust deeds.
“Being senior unsecured debt, the bonds bear the same probability of default as the issuer and would reflect similar recovery prospects to senior unsecured creditors in the event of a default”.
As such, the long-term rating for the respective bonds is equalised with MTN Nigeria’s long term senior unsecured rating.
The negative outlook reflects the risks to MTN Nigeria’s financial profile emanating from the large exposures to FX volatility on its critical operating expenses, debt and lease liabilities, GCR Ratings said.
It added that maintaining the current ratings depends on successful and timely implementation of planned initiatives to renegotiate its FX exposures, in the absence of which GCR would expect financial losses to be sustained and key gearing metrics to deteriorate further. Ways and Means Securitisation Responsible for N24trn Debt Rise – DMO
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