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Fitch Revises IHS's Outlook to Negative; Affirms at 'B plus'

Reviews & Outlooks	1007 VIEWS
Reviews & Outlooks
1007 VIEWS

Wednesday, January 15, 2020 /12:59 PM / By Fitch Ratings / Header Image Credit: Jeuneafrique

Fitch Ratings has revised IHS Netherlands Holdco B.V.'s (IHS Netherlands) Outlook to Negative from Stable while affirming the Long-Term Issuer Default Rating (IDR) at 'B+' and the senior unsecured rating at 'B+' with a Recovery Rating 'RR4'.

The rating action follow the revision of the Outlook on Nigeria's Long-Term Foreign-Currency (FC) Issuer Default Rating (IDR) to Negative from Stable on 19 December 2019. Fitch's assessment of IHS Netherlands' fundamental credit considerations is unchanged.

Key Rating Drivers

Sovereign Constraint: IHS Netherlands' ratings are constrained by the Nigerian Country Ceiling, which is aligned with the sovereign's Long-Term FC IDR. This reflects that the group's operations, and customers, are wholly based in Nigeria. The Outlook revision reflects the likely correlation of rating action with further changes of the sovereign rating - assuming that the Country Ceiling continues to be aligned with the sovereign IDR. The Outlook on IHS's National Long-Term Rating remains Stable as we do not expect this rating to change if the sovereign rating is downgraded.

Leading Nigerian Tower Operator: IHS Netherlands is the leading tower company in Nigeria, with 16,495 towers (end-September 2019). This market position is protected by high barriers to entry, high switching costs, and the quality of the group's service. Around 68% of all mobile towers in Nigeria are owned by independent tower infrastructure operators. The Nigerian market also features high independent tower company concentration, with IHS Netherlands and American Tower owning over 88% of the towers held by independent tower companies. We estimate IHS Netherlands owns 68% of the towers held by independent tower companies, and 46% of the total towers in Nigeria.

Strong Demand and Potential Growth: IHS Netherlands is well-placed to benefit from strong growth potential in Nigerian telecoms. We expect it to continue growing strongly, as the telecommunications market in Nigeria is seeing strong demand for mobile services. With fixed-line population penetration of 0.2% in Nigeria in 2018, 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.

Good 3Q19 results: IHS Netherlands' 9M19 results showed underlying revenue growth of 11.5%, with a pre-IFRS adjusted EBITDA margin of 60.4%. The group should comfortably hit our 2019 full-year forecasts, with funds from operations (FFO)- adjusted net leverage expected to have remained at around 3.0x at end-2019, well within the leverage threshold for the current 'B+' rating.

FX Exposure: The majority of the group's revenue is linked to the US dollar. Payments are made in naira, with the US dollar component converted in to naira for settlement at a fixed conversion rate for a stated period. The US dollar conversion rate is based on the Central Bank of Nigeria (CBN) and depending on the contract reset after a period of three, six or 12 months. These FX resets were shown to be effective in 2017 when the naira was devalued.

Negative Impact if NAFEX Weakens: Further weakening of the Nigerian Autonomous Foreign Exchange Rate (NAFEX) relative to the CBN rate could have a negative impact on the restricted group's financials as the group reports its financials in the US dollar using the NAFEX rate. A significant part of the group's EBITDA is linked to the US dollar as most of the group's operating costs are either naira-denominated or related to the cost of diesel, where there are some indexation components. Capex is paid in naira, with elements linked to the US dollar.

No Notching for Parent Linkage: Despite IHS Netherlands' strategic importance to parent, IHS Holding Limited, the lack of parental guarantees for the restricted group's debt and given that IHS Netherlands operates on a standalone basis, both legal and operational ties are deemed weak. As such, we do not apply any notching for parent and subsidiary linkage (PSL). However, we believe the parent would provide liquidity support to IHS Netherlands if there is a delay in obtaining US dollars for debt service at the latter. Our PSL approach could change if there is a significant change in the parent's dependency on the cash flow of IHS Netherlands.

Derivation Summary

IHS Netherlands' 'B+' rating is constrained by Nigeria's Country Ceiling, reflecting the challenging macroeconomic operating environment. IHS Netherlands is well-positioned within the Nigerian tower market as it commands the number-one position within the largest telecoms market in Africa. Except for its weaker operating environment, IHS Netherlands shares some operating and financial characteristics with its investment-grade international peers, such as American Tower Corporation (BBB/Stable), Cellnex Telecom S.A. (BBB-/Stable) and PT Profesional Telekomunikasi Indonesia (BBB-/Positive).

The Recovery Rating of the debt instruments is capped at 'RR4' and limited to a 50% rate of recovery due to country considerations.

Key Assumptions

Fitch's Key Assumptions within our Rating Case for the Issuer

Low- to mid-single digit revenue growth per year on a pro-forma basis (for the enlarged group after the combination with INT Towers) over the next four years, driven by continued demand for mobile infrastructure, assuming no further devaluation of the naira;

EBITDA margin for the enlarged restricted group to remain around 59% over the next four years;

Capex-to-revenue for the enlarged restricted group declining to mid-to-high teens percentage in 2022 from around 21% in 2019; and

No dividends paid in 2020-2022.

Key Recovery Rating Assumptions

The recovery analysis assumes that IHS Netherlands would be considered a going concern in bankruptcy and that the group would be reorganised rather than liquidated;

A 10% administrative claim;

The going-concern EBITDA estimate of USD391 million reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the valuation of the group;

The going-concern EBITDA is 20% below end-2018 pro-forma pre-IFRS16 EBITDA of the enlarged group (including INT Towers);

An enterprise value multiple of 5.5x is used to calculate the post-reorganisation valuation. IHS Netherland's recovery prospects for USD1 billion equivalent of senior unsecured debt, comprising an USD1.3 billion bond, USD500 million equivalent of bank loans and a revolving credit facility (RCF) facility of USD120 million held at IHS Holding Limited and assumed fully drawn, are limited to 'RR4' with a 50% rate of recovery due to country considerations. The shareholder loans from IHS Group to the operating subsidiaries of the restricted group have been treated as equity and excluded from our debt analysis.

Rating Sensitivities

IHS Netherlands

Developments That May, Individually or Collectively, Lead to an Upgrade

Upgrade of the Nigerian sovereign rating, together with FFO-adjusted net leverage below 5.0x (2018: 2.9x) on a sustained basis, and FFO fixed charge cover greater than 2.5x (2018: 2.6x).

Developments That May, Individually or Collectively, Lead to Downgrade

FFO-adjusted net leverage above 5.5x on a sustained basis.

FFO fixed charge below 2.0x.

Weak free cash flow due to limited EBITDA growth, higher capex and shareholder distributions, or adverse changes to the group's regulatory or competitive environment.

Liquidity risks, including challenges in moving cash out of Nigeria to IHS Netherlands to service offshore debt.

Downgrade of the Nigerian sovereign rating.

Nigeria - Sovereign Rating

The main factors that could lead to a rating downgrade are:

Rising risks of disorderly or abrupt adjustment of the exchange rate under the current policy framework;

Failure to achieve a sustainable fiscal consolidation, leading to a marked rise in the ratios of government debt and interest payments to fiscal revenues; and

Worsening of the political and security environment that significantly disrupts oil production or economic activity for a prolonged period.

The main factors that could lead to the Outlook being revised to Stable:

Stronger external finances, for example from exchange-rate regime reform or stronger external liquidity buffers;

Credible path to smaller fiscal deficits from stronger mobilisation of domestic non-oil revenues and improved public finance management; and

Stronger growth outlook, for example due to progress on the implementation of structural reforms and macroeconomic policy adjustments.

Liquidity And Debt Structure

Initial Liquidity Limited: We estimate that post-enlargement and refinancing in September and October, IHS Netherlands will have around USD50 million-equivalent of cash in Nigeria. We expect cash balances to rise in the next 12 months as the business generates strong free cash flow. Over time, we would expect cash in US dollars to be up-streamed out of the Nigerian operating subsidiaries to IHS Netherlands or ultimately to the parent company.

The new debt structure does not have upcoming debt payments over the next 24 months. The new US dollar and naira credit facilities have an amortising profile but only after a two-year grace period. IHS Group has a USD120 million undrawn revolving credit facility guaranteed by IHS Netherlands. Furthermore, the Nigerian operations form a vital part of the IHS Group, strengthening our view that the parent will support the Nigerian entities' liquidity in case it has difficulties remitting money out of Nigeria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity.

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