Fitch Affirms IHS Netherlands HoldCo at 'B plus'; IDR Constrained By Nigerian Country Ceiling


Tuesday, May 14, 2019  10:15AM / Fitch Ratings / Header Image Credit: LinkedIn


Fitch Ratings has affirmed IHS Netherlands Holdco BV's (IHS Netherlands) Long-Term Issuer Default Rating (IDR) at 'B+'. The Outlook on the IDR is Stable. The IDR is constrained by the Nigerian Country Ceiling of 'B+'. Positively, developments in the past 12-18 months demonstrate that IHS Netherlands' free cash flow (FCF) generation is resilient in the face of FX volatility and despite one of its key customers getting into financial distress.IHS Netherlands, through its fully owned subsidiaries, owned 6,524 telecommunications towers in Nigeria at end-2018. Collectively these companies are the restricted group (IHS) , as outlined in the bond documentation, owned ultimately by IHS Holding Limited (IHS Group), the mobile telecommunications infrastructure company operating around 24,000 towers across Africa.


Key Rating Drivers

Sovereign Constraint

We assess IHS Netherlands' ratings as being constrained by the Nigerian Country Ceiling of 'B+'. This reflects that the group's operations and customers are wholly based in Nigeria.


Available Liquidity

The restricted group currently benefits from cash in US dollars held outside of Nigeria, which we estimate could be used to fund around one year of interest on IHS Netherlands' USD800 million notes due 2021. Further resources - cash and an undrawn revolving credit facility (RCF) of USD120 million - remain available at the parent, IHS Group. We would expect at least some of these to be available to cover debt service in the event of a lack of liquidity at IHS Netherlands. However, these resources are not dedicated to the restricted group.


FX Change and Restricted Cash

During 2018, IHS adopted the Nigerian Autonomous Foreign Exchange Rate (NAFEX) of NGN360/USD, resulting in the use of a 15.5% weaker FX rate. Despite the majority of the group's revenue being denominated in US dollars, and major US dollar-linked customer contracts using the CBN rate, IHS maintained flat revenue while underlying revenue grew 18.5% y-o-y. EBITDA marginally declined, with margin contracting 2pp, pushing year-end 2018 gross debt-to-EBITDA to 3. 7x, an increase of 0.1x, materially lower than our previous expectations of 4.3x. IHS has also reported that restrictions on certain bank accounts, due to instructions received by the group's banks from the Nigeria Economic and Financial Crimes Commission (EFCC), have been removed. This has resulted in USD35 million (equivalent) of cash being returned to current assets on the balance sheet in 2018. IHS confirmed that no amounts remain restricted. This increase to available cash following the release of restricted cash reduces our forecast 2019 funds from operations (FFO) adjusted net leverage by 0.1x.


Ample Headroom

Given the constraint on the IDR due to the Nigerian Country Ceiling of 'B+', IHS maintains an operating profile above its current rating. IHS has ample headroom against its downgrade threshold of 5.5x FFO adjusted net leverage, particularly if operational performance comes under pressure from adverse economic developments in Nigeria or FX volatility.


Strong Demand and Potential Growth

We expect the restricted group to continue growing strongly, in line with the telecommunications market in Nigeria, driven by strong demand for mobile services, especially for 3G and 4G data connections. IHS's 2018 results support our view, with underlying revenue growth of 18.5%. This was driven by the construction of 629 new towers, bringing the total to 6,524, as well as further growth in new tenants and lease amendments. The restricted group also receives management fees for managing around 10,000 towers in Nigeria acquired by IHS Group from MTN.


9mobile Developments

9mobile, formerly trading as Etisalat Nigeria, had experienced some operational disruptions over the past 12 months and some uncertainty remains over a change in shareholders. 9mobile remains a key customer of IHS Netherlands and continues to run its mobile network, serving around 17 million subscribers. The Nigerian telecoms market experienced strong sequential subscriber growth in 4Q18, with quarterly growth in subscriber numbers from all operators, including 9mobile.


Although subscriber growth at 9mobile provides some visibility on stabilising operations, we believe some short-term financial risks remain for IHS Netherlands. The group may experience delays in collecting payments from 9mobile over the short term, which could impact EBITDA and cash flow generation in 2019 and may result in temporarily higher leverage. However, medium-term prospects should remain broadly intact. With the overall mobile market in Nigeria continuing to grow in terms of subscribers as well as data traffic, we believe that the majority of 9mobile's network infrastructure will remain in use to provide much needed network capacity in Nigeria.


Limited FX Exposure

The majority of the restricted 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 USD 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 with the naira devalued. However, further weakening of the NAFEX rate relative to the CBN rate could have a negative impact on the restricted group's financials as the group's financials are converted into 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 pass-through components. Capex is paid in naira, with elements linked to the US dollar.


Parent Subsidiary Linkage

Fitch has assessed the relationship between IHS Netherlands, the restricted group, and their parent, IHS Holding Limited, under our Parent and Subsidiary Linkage (PSL) criteria. Despite IHS Netherlands' strategic importance to the group, 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 PSL. 


Derivation Summary

IHS Netherlands' 'B+' rating is constrained by Nigeria's Country Ceiling. IHS Netherlands is well positioned within the Nigerian tower market as it commands the number-one position within the largest telecoms market in Africa. Including towers bought from MTN, we estimate that IHS Group has an approximate 70% market share of the independent tower market or a 54% share of all Nigerian towers. Underlying demand is strong. With fixed-line population penetration of 0.1% in Nigeria in 2016, 3G and 4G networks are the main means of providing high-speed broadband connectivity. IHS Netherlands is reasonably positioned with strong margins and moderate leverage compared with its investment-grade international peers, such as American Tower Corporation (BBB/Stable), Cellnex Telecom S.A. (BBB-/Negative) and PT Profesional Telekomunikasi Indonesia (BBB-/Stable). 


Key Assumptions

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


  • Low- to mid-single digit revenue growth per year over the next few years, driven by continued demand for mobile infrastructure, assuming no further devaluation of the naira;


  • EBITDA margins to remain stable at 63% over the next four years ;


  • Capex-to-revenue declining to approximately 21% in 2022 from 23% in 2019; and


  • No dividends paid in 2019-2022.


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 USD194 million reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the valuation of the company;


  • The going-concern EBITDA is 20% below year-end 2018 EBITDA;


  • An enterprise value multiple of 5.5x is used to calculate the post-reorganisation valuation; and IHS Netherland's recovery prospects for USD1 billion equivalent of senior unsecured debt, comprising an USD800 million bond, USD80 million equivalent capex facility, USD13 million HTN bonds and an 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. 


Rating Sensitivities

IHS Netherlands Developments That May, Individually or Collectively, Lead to Positive Rating Action- Upgrade of the Nigerian sovereign rating, together with FFO-adjusted net leverage below 5.0x (2017: 3.0x) on a sustained basis, and FFO fixed charge cover greater than 2.5x (2018: 2.9x).


Developments That May, Individually or Collectively, Lead to Negative Rating Action


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


  • FFO fixed charge below 2.0x.


  • Weak FCF due to limited EBITDA growth, higher capex and shareholder distributions, or adverse changes to the restricted group's regulatory or competitive environment.


  • Downgrade of the Nigerian sovereign rating.


Nigeria The main factors that could lead to positive rating action are:


  • A reduction of the fiscal deficit and the government debt/revenue ratio.


  • Implementation of structural reforms and macroeconomic policy adjustments that increase economic growth potential.


The main factors that could lead to negative rating action are:


  • Failure to achieve a sustainable fiscal consolidation leading to a marked rise in the government debt/revenue ratio.


  • A loss of foreign exchange reserves that increases vulnerability to external shocks.


  • Worsening of political and security environment that reduces oil production for a prolonged period.


Liquidity And Debt Structure

Strengthened Liquidity The restrictions on IHS's USD35 million cash due to "post no debit" instructions imposed by the EFCC were lifted in 2H18. No restricted amounts remain and IHS reported end-2018 readily available cash of USD184 million. IHS's available cash comfortably covers short-term debt requirements, with the next material repayment, their USD800 million bond, falling due in 2021.


Summary Of Financial Adjustments

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