Reviews & Outlooks | |
Reviews & Outlooks | |
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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.
Related Link: Fitch Revises Outlook on Nigeria to
Negative; Affirms at 'B plus'
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
Key
Recovery Rating Assumptions
Rating Sensitivities
IHS
Netherlands
Developments
That May, Individually or Collectively, Lead to an Upgrade
Developments
That May, Individually or Collectively, Lead to Downgrade
Nigeria
- Sovereign Rating
The
main factors that could lead to a rating downgrade are:
The
main factors that could lead to the Outlook being revised to Stable:
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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