A blanket of gloom hangs over Cell C’s rescue plan

The downgrade of Cell C’s corporate credit rating to the junkiest of junk by S&P Global Rating is another blow to the telecommunications company’s brave ambition of reducing its crippling debt load of R20.7 billion.

This is the view of market watchers after S&P Global Rating downgraded Cell C’s credit rating on Monday after it missed interest payments in January on its €400 million senior secured bonds that are due in 2018.

The credit rating of SA’s third-largest mobile operator has been lowered to “D”, the lowest ‘junk’ level rating on S&P’s scale, from CC or highly vulnerable to nonpayment – a move that will make it expensive for Cell C to return to the bond market to raise capital. Cell C’s missed interest payments also prompted S&P Global Rating to flag constraints to its liquidity due to delays in its long-touted capital restructure.

The company is in the middle of its capital restructure plan involving shareholders, among them prepaid technology specialist Blue Label Telecoms, which is in the process of buying a 45% stake in Cell C.

Blue Label Telecoms, through its spokesperson, said it would revert to the market on its participation in Cell C’s recapitalisation by the end of February, thus declining to comment on S&P’s downgrade.

Cell C said various capital and interest payments to lenders have been deferred as part of its recapitalisation process. “This has no direct impact on the underlying business of Cell C and the operational performance of the company remains strong,” it said in a statement.

In addition to Blue Label becoming a Cell C shareholder, the company’s recapitalisation plan would result in a shareholding structure change – with management and staff of Cell C expected to subscribe for 25% of the issued capital and 3C Telecommunications subscribing for new equity to hold the remaining 30% of the total issued share capital.

Portfolio manager at Argon Asset Management Mark Ansley said the longer it takes for the funding of Cell C to be sorted “the worse it looks for a successful solution to Cell C’s restructuring.” ICT research analyst at Frost & Sullivan Africa Mauritz Venter supported Ansley’s view, adding that the S&P downgrade would prolong its ailing liquidity flows.

In November, Cell C aborted plans to raise $600 million – or R8.5 billion in rand terms at the time – on the bond market, informing Blue Label that it planned to reduce its debt without the bond placement. A successful bond placement and a R16 billion injection to its balance sheet from new and existing shareholders was expected to reduce Cell C’s debt up to R8 billion.  However, Blue Label was informed by Cell C in November that it was in discussion with its funding providers to secure borrowings of up to R6 billion.

Prior to Cell C’s bond placement withdrawal, rating agency Moody’s placed Cell C’s B3 rating under review and was looking to assign a B2 rating on its proposed notes to raise capital. A B3 rating is typically regarded as non-investment grade and any upgrade of its rating hinged on the successful implementation of its recapitalisation.

Cell C has struggled to keep up with its rivals Vodacom and MTN over the past five years, given their increasing dominance in a competitive telecommunications market with more revenue potential in data than voice.

To claw back market share, Cell C has embarked on cost-cutting initiatives and has recently raised both voice and data tariffs. “I would read this as a sign of stress from a company that is seeking to win market share in the mobile market,” Ansley told Moneyweb.

An expected recovery in the commodities market should see the rand strengthen and lead to price reductions by Cell C in the medium to long term, said Venter. “This will aid in preventing customer churn, while attracting new consumers to Cell C.”

On a positive note, S&P said that the company has not sought bankruptcy protection, and it still expects Cell C to continue to operate and meet its non-debt obligations, including payroll and suppliers. “However, we note that the company currently relies on its lenders not exercising their acceleration rights as negotiations on a restructuring continue.”

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