Analysts expect the credit ratings downgrade on MTN to have minimal effect in the short term, but warned that it may put future dividends at risk.
On Wednesday Moody’s downgraded MTN, a communication services company, along with other companies following the downgrading of SA’s credit ratings by Moody’s last week, in the wake of S&P Global Ratings and Fitch junking the country’s foreign currency rating.
Moody’s has downgraded senior unsecured notes issued by MTN to Ba1 from Baa3. The group’s outlook was changed to stable from negative.
MTN is facing a number of headwinds in its key markets, SA and Nigeria, including weak macroeconomic environments, regulatory challenges, local currency weakness and dollar shortages in Nigeria, which has negatively affected the group’s performance.
Moody’s viewed MTN’s liquidity as "good" for the next 12-18 months with internally generated cash flows and sufficient undrawn committed facilities to meet the capital investments in Nigeria, SA and Iran, as well as the firm’s dividend payout.
Moody’s was monitoring MTN’s inability to upstream dividends from MTN Nigeria, its funding requirements for MTN SA and dividend payments to equity shareholders and the effect this will have on the mobile network operator’s liquidity profile and credit metrics.
Matthew Auerbach of Capricorn Fund Managers said the downgrade was "quite significant as it puts the dividend in future years at risk. Whilst management have committed to the dividend this year, the market may be disappointed by the
dividend in future years. Share prices don’t react well to dividend cuts."
MTN’s share price declined nearly 2% to close at R111.60.
Mergence Investment Managers portfolio manager Peter Takaendesa expected the downgrade to have a minimal effect on the company in the near term, but the risk, not only to MTN, was that SA would be downgraded further and corporates were dragged down.
According to Takaendesa, most of MTN’s debt was long dated and some of it was on fixed interest rates.
"Only about 10% of their gross debt is due to be refinanced this year and there is no material further debt raising requirement as they managed to repatriate a significant amount of cash from Iran … this year."
Takaendesa expected the group’s elevated capital expenditure levels to start dropping from 2018. MTN forecast capital expenditure of R35bn in 2017.