Moody's puts Telkom on downgrade watch

2011-06-30 22:23

Johannesburg - Moody's has placed the Baa1 senior unsecured issuer rating of telecommunications operator Telkom [JSE:TKG] and the national scale long-term issuer rating under review for possible downgrade, it said Thursday.

The ratings agency said this was due to increased concerns about the company's operating challenges to stem its revenue losses and margin compression in the face of intensifying competition, continued migration of its higher-margin fixed-line traffic to mobile and regulatory changes.

"Telkom operations, strategies and market image has furthermore been impacted by a series of management changes in the past two years which, in addition to the substantial costs Telkom faces to successfully stabilise its start-up mobile operations that are only expected to reach breakeven Ebitda margins in 2014, are contributing factors to the decision to review the current rating positioning," said Soummo Mukherjee, a Moody's vice president-senior analyst and lead analyst for Telkom.

Moody's noted that Telkom had in recent years suffered more than originally anticipated following the downgrade from A3 to Baa1 with a negative outlook of its senior unsecured issuer rating in October, 2009, due to its loss-making Nigerian operations, Multi-Links, where Moody's nevertheless acknowledged substantial execution risk existed.

After having invested R9.8bn over the past four years and after the attempt to sell Multi-Links to Visafone for $52m was blocked by a lawsuit, the company finally entered into a sale agreement with an affiliate of Helios Towers Nigeria, for just over $10m.

"Despite these losses, a sale, once concluded, will at least avoid further cash drains for Telkom," the ratings group said.

"Moody's, however, acknowledges Telkom's reduction in operating costs and capital expenditure discipline over the past year that allowed the company to generate positive free cash flow and offset part of the decline in revenues in terms of its Ebitda margin preservation," the group said.

It added that Telkom's declining operating performance had been offset to a large extent by its significant reduction of debt using part of the proceeds from the Vodafone stake sale in 2009 of approximately R19.2bn.

Thus, Telkom still reported very low leverage of 1.3 times on a Total Debt to Ebitda basis at the end of FY 11 and overall healthy cash flow to debt metrics for its rating category.

Moody's said its review for possible downgrade would focus on Telkom's strategic plan to successfully bundle its service offerings in order to minimise revenue losses and margin compression, along with its most current financial plan for the next two to three years.

The ratings firm said it would also eye out Telkom's business profile and credit metrics compared to similarly rated peers along with its expected level of government support and dependence currently incorporated in its rating.