An investment analyst says Cell C needs significant fresh equity funding, or to participate in industry consolidation so that it can strengthen both its financial and market position.
Peter Takaendesa, senior equity investment analyst at Mergence Investment Managers, commenting on the latest Cell C downgrade by a global rating agency, adds: “Without a fresh capital injection into the telco, Cell C’s credit rating will be downgraded further.”
Standard & Poor’s (S&P) yesterday downgraded Cell C’s debt rating further after Cell C renegotiated terms of its R1.4 billion debt.
The rating agency says while no conventional payment or legal default event has occurred to date, it views the repayment profile restructuring as a distressed exchange.
This is the second time in the space of three months that the under-pressure operator has been downgraded by S&P for its debt profile.
In April, the agency lowered Cell C’s issuer credit rating to CCC- from CCC+, placing it deeper in trouble territory; now, it has been lowered further to 'SD' (selective default) from 'CCC-'.
“We are therefore lowering our rating on Cell C to 'SD' (selective default) from 'CCC-' and our issue rating on the company's senior secured debt to 'CC' from 'CCC'. The '2' recovery rating reflects our estimate of substantial (70%-90%, rounded estimate: 85%) recovery to creditors in the event of a payment default,” notes S&P.
In a statement, S&P says: “We view the repayment profile restructuring as a distressed exchange and tantamount to selective default, given Cell C’s weak liquidity position.”
Takaendesa says S&P’s decision will have limited impact going forward based on “this change alone”, but “If Cell C continues to receive downgrades, then its access to funding could dry up completely, or cost of funding will skyrocket to compensate for the increasing risks.”
He adds: “Unfortunately, this means Cell C’s capital structure is still not sustainable and remains a concern given the tougher trading conditions in the South African mobile market.”
Responding to the downgrade, Cell C CEO Douglas Craigie Stevenson, in a statement, says the operator has been in consultation with S&P on its liquidity, recapitalisation and operational initiatives in anticipation of the release of the S&P research report.
“Cell C is actively pursuing an appropriate liquidity platform with a view to implementing a comprehensive recapitalisation and other measures, with the support of its financial lenders and its shareholders. As part of these ongoing initiatives, Cell C renegotiated the terms of certain aspects of its debt, with the backing of the applicable lenders.”
However, Takaendesa comments: “Without fresh capital injection into Cell C and assuming the South African mobile market remains challenging as we have seen over the past 12 months, I would not be surprised if Cell C’s credit rating is downgraded further.
“Fortunately, Cell C’s key shareholders understand this situation and are likely accelerating the process to inject new capital into the business. The key question will remain: is that enough or is it just patching the balance sheet as we have seen before.”
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