Liquid Zim operations disappoint, rating remains ‘junk’

Moody’s Investors Service has confirmed Liquid Telecommunications Holdings Limited’s “junk status” by giving both the company and its US$730 million loan (senior secured notes) a B1 rating.

B1 rating is one of several non-investment grade ratings (also known as “junk”) that may be assigned to a company, fixed-income security or floating-rate loan.

This rating signifies that the issuer is relatively risky, with a higher than average chance of default.

Moody’s, which also said the rating outlook for Liquid remains negative, gave the company’s corporate family rating (CFR) of B1 and probability of default rating (PDR) of B1-PD.

According to Moody’s senior analyst, Dion Bate, Liquid’s leverage and interest cover metrics remain susceptible to local currency fluctuations against the US dollar.

A decline in financial performance from its Zimbabwe operations remains a worry for Liquid and creditors.

The EBITDA contribution from Zimbabwe reduced to 14 percent in the last 12 months (LTM) ending May 31, 2020 from 32 percent in the 2019 fiscal year ending February 28, 2020.

This contribution, according to Moody’s, is expected to reduce towards 5 percent in 2021 driven by the continued devaluation of the Zimbabwe currency (Real-Time Gross Settlement, “RTGS”) against the US dollar and growth from the rest of the operations.

Moody’s says the latest rating is constrained by Liquid Telecom’s presence in countries with high geo-political risk and weak institutional strength, as it is the case in Zimbabwe which continues to face currency weakness, hyperinflation, and dollar illiquidity.

Also causing constrain is the company’s exposure to currency risks due to mismatch between local currency cash flows and dollar debt obligations; as well as a track record of negative free cash flows due to significant investments made in its fibre network and data centres that are expected to reduce as future capital expenditure is aligned to operational cash flow generation.

Moody’s, however, said Liquid had managed to maintain current ratings due to its diversified operations.

“The affirmation reflects the benefits of a diversified business across 13 African countries that have enabled Liquid Telecom to withstand a decline in financial performance from its Zimbabwe operations,” said Bate.

The affirmation of Liquid Telecom’s B1 CFR reflects the significant ramp-up in revenues and EBITDA generated in South Africa over the last 12 months, which contributed to offset the challenges that the company faces in Zimbabwe as a result of the sharp depreciation of the local currency and difficulties in repatriating cash.

The affirmation of the rating also reflects a decline in gross leverage excluding Zimbabwe.

Moody’s assesses the company’s leverage and liquidity excluding Zimbabwe because the difficulties in accessing US dollar and transferring cash out of the country continue and this cash flow cannot be reliably used to service debt.

The strong performance from the South African operations during fiscal 2020 has resulted in the revenue contribution to the Group increasing to 53 percent as of LTM May 2020 from 40 percent in fiscal 2018.

However, the company remains exposed to currency risk given the large currency mismatch between its local currency cash flows and US dollar debt obligations.

Moody’s estimates that around 74 percent of the Group’s EBITDA is earned in local currencies, namely the South African rand (53 percent of consolidated EBITDA before eliminations), Zimbabwe RTGS $ (14 percent), and other local African currencies (7 percent).

Despite the non-investment grade rating, Liquid is said to have positive operating cash flows, which is sufficient to service debt obligations and capex over the next 18 months.

However, Moody’s note that there is a refinancing wall approaching in the next 2 years, with the $730 million senior secured notes maturing in July 2022.

Moody’s understand from management that they are already investigating various funding options to refinance the bond, which may include issuing a combination of Rand and US$ denominated debt in order to achieve a better currency match.

On the negative outlook tag given to the company, Moody’s said the negative outlook reflects the macroeconomic challenges that South Africa and other African countries face and which have already triggered a depreciation of their currencies against the US dollar.

“This is likely to create some volatility in the company’s credit metrics as well as lead to a more challenging business environment.

“The outlook also reflects the approaching maturity of the outstanding bond in 2 years which would put pressure on the rating if not addressed in a timely

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