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London - Moody's Investors Service affirmed on Wednesday the Baa3 local currency long term issuer rating of Naspers [JSE:NPN] and the Baa3 senior unsecured rating issued by Myriad International Holdings B.V. ("MIH").
The rating outlook remains stable.
The affirmation follows the release of the 2014 financial results and observed weaker leverage metrics.
Ratings rationale
"The affirmation reflects our view that the liquidity offered by the sizable listed equity holdings in Tencent Holdings and Mail.ru Group of over R577bn and available cash balances of R13.7bn provides tolerance for the credit metrics to temporarily exceed our current downward rating guidance", said Dion Bate, a Moody's local market analyst for Naspers.
"Naspers strategy of higher investment spend in its e-commerce businesses during the 2014 financial year has resulted in lower than expected Ebitda generation leading to weaker credit metrics beyond our current downward rating guidance."
As Naspers continues to pursue its e-commerce growth strategy through high development spend he anticipates the credit metrics to remain weak for the Baa3 rating position for the next 18 to 24 months.
In this regard, Moody's expects Naspers' adjusted debt/Ebitda to be
range bound between 5.0x and 5.5x for the next two years before improving to levels within its rating guidance.
This is as the e-commerce business is monetised and begin to positively contribute to group cash flows and reduced capex spend to rolling out its digital terrestrial television (DTT) platform.
Naspers' Baa3 global local currency issuer rating reflects its leading market positions across a range of diversified media subsectors that are at different stages of maturity and in a variety of geographies.
The rating also takes into account the group's strong operating performance, sustainable cash flow generation profile and good growth prospects.
Financial flexibility
"Moreover, the rating is enhanced by the financial flexibility provided by Naspers' valuable holdings in publicly quoted entities such as Tencent and Mail.ru, whose growing dividend streams are a source of additional cash flow."
Moody's recognises Naspers' robust performance in the pay-TV business, with profitable subscriber growth notably in the low income segment, which is set to gain further traction driven by the current low market penetration in sub-Saharan Africa and the improved affordability of entertainment packages.
The group also has limited exposure to more cyclical advertising-related revenues, a track record of consistent strategy execution and financial policies that include ensuring it has sufficient rand cash flows from its pay TV and print business to meet the group's debt and operating expenditures, maintaining a strong liquidity profile and a disciplined approach to investments.
However, the Baa3 rating also takes into account the group's weaker credit metrics and position as an emerging market operator and its susceptibility to political and economic instability, as well as to regulatory and currency
fluctuation risks.
In addition, Naspers' rating is constrained by its complex organisational structure as debt service is predominantly reliant on cash flows generated by entities - including SA pay-TV and print - that have minority shareholders.
Naspers' liquidity profile is supported by cash balances of R13.7bn, a total of $2.5bn revolving credit facilities, which had R16.8bn available as of March 31 2014 and an expectation of positive operating cash flow generation to meet forecast cash uses for the next 12 months.
"Furthermore, we gain comfort from the additional liquidity offered to Naspers in the form of its listed investments: Tencent and Mail.ru. Together these investments are valued at over R577bn as of August 14 2014 and through their sale could be used to alleviate any liquidity pressure that could arise," he said.
Stable outlook
The stable outlook reflects Moody's expectation that the group will maintain its leadership positions in the media subsectors in which it operates, deliver solid operating and financial performance from its pay-TV business and
continue to apply a disciplined approach to development spend, specifically within its e-commerce businesses.
Negative pressure on the rating could develop if Naspers' business risk profile deteriorates, operational underperformance or material debt- financed acquisitions to the extend credit metrics weaken materially from current levels, the value of Naspers' stake in Tencent and Mail.ru (or similar associate investments) weakens materially or the ability of these investments to declare dividends in line with historical trends is adversely impacted and if Naspers does not maintain a strong liquidity profile.
"In the absence of Naspers' sizable publicly traded equity stakes in Tencent and Mail.ru we would expect leverage (gross debt/Ebitda) to be below 4.0x and RCF/debt (retained cash flow / gross debt) above 10%," he said.
"However, given the value of its listed equity holdings, sizable cash balances of R13.7bn and strong liquidity position the Baa3 rating has tolerance for higher leverage to pursue its strategy of growing its e-commerce businesses."
All credit metrics are based on Moody's standard definitions and analytic adjustments.
On the other hand, upward pressure on Naspers' rating or outlook could result from a decision to implement more conservative financial metric targets.
"This would also assume less flexibility in the ratings for debt financed
acquisitions, which have been a feature in the past with Naspers' rating positioning," he said.
* Fin24 is part of Media24, a Naspers subsidiary.
