Monday 20, March 2017 by Matthew Amlôt

S&P: Helios Towers Africa assigned 'B' rating on completion of refinancing; outlook stable

S&P Global Ratings today assigned its 'B' long-term corporate credit rating to mobile tower company Helios Towers Africa Ltd. (HTA) and its financing subsidiary, HTA Group Ltd.

“We view HTA Group Ltd. as core to the group as it is a wholly owned entity that bears the entire group's senior debt. The outlook is stable.

“We also assigned our 'B' issue rating to the senior notes issued by HTA Group Ltd. The ratings are in line with the preliminary ratings we assigned on Feb. 14, 2017.

“The rating action follows HTA's successful issuance of $600 million of senior notes and our satisfactory review of the final documentation. The proceeds were used to repay the group's secured term loan facilities, excluding the $8 million of shareholder loans linked to previous tower acquisitions. In addition, the proceeds cover transaction fees, pending tower acquisitions, the buyout of a minority stake in its Tanzanian subsidiary, and provide additional liquidity for capital expenditure (capex).

“Our rating on HTA primarily reflects its high debt, negative free operating cash flow (FOCF) in 2017, and lower profitability than peers. These negative factors are mitigated by our anticipation that HTA will have adequate liquidity and that its credit ratios will gradually strengthen, given that the company has achieved sufficient scale to sustain EBITDA growth. We also expect that HTA's FOCF will be break-even or positive from 2018 and that it will pass our hypothetical sovereign default stress test for its largest service areas, Democratic Republic of Congo (DRC) and Tanzania.

“Our assessment of HTA's business risk takes into account high country risks, low profitability, and modest scale. HTA operates primarily in Tanzania and DRC (together, these provide about 80 per cent of consolidated revenues and EBITDA), and to a lesser extent, in Republic of Congo and Ghana. We estimate that HTA is exposed to significant country risks, which include political and social risks in DRC and low institutional effectiveness in Republic of Congo and, to a somewhat lesser degree, in Tanzania and Ghana.

“At about only 36 per cent in 2016, HTA's S&P Global Ratings-adjusted EBITDA margin is below the average range of 45 per cent-60 per cent for mobile tower companies. We expect its adjusted EBITDA margin will improve toward 45 per cent or more in 2018 as scale grows, although it will likely remain below the margins of rated peers in Europe or the U.S. However, we acknowledge that the relatively low lease prices HTA charges its customers as part of agreed terms are offset by a number of positive factors, including the initial valuation of the towers and the contracts' length and currency terms. The low lease prices are likely to mean less price pressure from customers.

“Lastly, HTA owned and operated about 6,500 tower sites as of Oct. 31, 2016, and we expect its annual revenues to be about $280 million in 2016, which is relatively modest compared with most rated tower operators.

“These weaknesses are partly offset by HTA's leading market position in three of its four countries of operation, contracted revenues and EBITDA, and growth opportunities. After several years of expansion--during which HTA acquired towers from mobile operators and, to a lesser extent, built its own towers--the company has become the market leader in three of its markets, with a 64 per cent market share in DRC, 61 per cent in Tanzania, and 50 per cent in Republic of Congo, according to HTA data. Furthermore, HTA faces limited competition in these countries, being the sole independent tower company. HTA is the No. three player in Ghana (which represents just 12 per cent-13 per cent of HTA's consolidated revenues), behind American Tower Corp. and Eaton Towers.

“Another strength is the predictability of HTA's revenues, given its contracted revenues from telecoms operators that have strong credit quality. HTA generates about 60 per cent of its revenues from investment-grade operators that we rate 'BBB-' or stronger. It also benefits from long-term contracts that have, on average, a remaining period of about 9.1 years. It also has a solid revenue backlog supported by already secured colocation commitments, that is, additional tenants in existing towers.

“Another factor supporting the visibility on HTA's revenues and EBITDA is the company's limited currency risk; it generates most revenues in U.S. dollars and Central African francs (pegged to the euro) and has limited exposure to changes in energy costs given power escalation components in most contracts.

“Moreover, most costs in local currencies are offset by revenues in local currencies. As a result, we understand that more than 80 per cent of HTA's EBITDA is U.S. dollar-based. We also think HTA's revenue growth could benefit from several factors: demographics, because more than 70 per cent of the aggregate population of HTA's countries of operation is under 30 years of age; a fast-growing mobile telecom sector (supported by almost no fixed broadband infrastructure, a still-low wireless penetration rate, and competition for mobile operators that could drive the need for more colocation); and regulation, with increasing domestic pressures to increase rural coverage and tower sharing, which could push up HTA's colocation rate.

“Our assessment of HTA's financial risk profile mainly reflects its high debt after the refinancing and negative FOCF in 2017, partly offset by our anticipation of adjusted EBITDA interest coverage of 2.0x-2.5x. That said, we expect credit ratios to strengthen over time, given our anticipation of growing EBITDA and in the absence of further acquisitions and dividend payments. In 2018, we think adjusted debt to EBITDA could improve to below 5x and that FOCF could reach at least break-even. With HTA's expansion phase ending, we think its future investment needs will decline significantly compared with 2015-2017. We adjust HTA's reported debt for operating lease obligations (about $140 million as of Dec. 31, 2015).

“In our base case, we assume:

  • Deceleration of annual revenue growth to 15 per cent-20 per cent in 2017 and six per cent-12 per cent in following years (after about 33 per cent in 2016), as HTA's expansion strategy through acquisitions is ending and future growth will primarily be organic. We understand that most of the organic revenue growth is secured by already signed colocation contracts, and we also expect additional revenues from increasing mobile traffic in each market. We anticipate continued tenancy ratio expansion to over 2x (defined as number of tenants per tower) in 2018, versus 1.8x in 2016 (1.6x in 2014) helped by the supportive dynamics of the mobile telecom markets in HTA's countries of operation.
  • Profitability improvements, including an adjusted EBITDA margin of above 40 per cent from 2017, up from about 36 per cent in 2016, based on overall scale effects and an increasing tenancy ratio as HTA adds highly profitable additional tenants to existing towers.
  • Capex remaining very high in 2017 at about 40 per cent of revenues, including a significant discretionary portion. It was about 60 per cent of revenues in 2016 and is expected to drop to about 20 per cent by 2018.
  • Acquisitions totaling $121 million in 2017, including $31 million for towers in Tanzania and DRC, and $92 million for Vodacom's minority stake in HTA's Tanzanian operations (of which $30 million has already been paid).
  • No dividends over our 2016-2018 forecast period.

“Based on these assumptions, we arrive at the following credit measures:

  • Adjusted debt to EBITDA of about 5.5x in 2017, falling below 5x in 2018.
  • Funds from operations (FFO) to debt of about 10 per cent in 2017, rising to 12 per cent-15 per cent in 2018.
  • Negative reported FOCF of $60 million-$80 million in 2017, turning at least break-even in 2018.

“The stable outlook reflects our anticipation of strong EBITDA growth but still negative FOCF in 2017, adequate liquidity, and an adjusted EBITDA interest coverage ratio of 2.0x-2.5x.

“We could raise our rating if HTA achieves significant revenue and EBITDA growth, coupled with adjusted debt to EBITDA consistently below 5x, an adjusted EBITDA margin of at least 45 per cent, and adequate liquidity. This should translate into FOCF to debt of about five per cent and an adjusted EBITDA interest coverage ratio of approximately 3x. We think these projections are within HTA's reach if it increases its colocation rate and benefits from the growth in mobile traffic.

“We could lower our rating on HTA if its FOCF remains negative over a prolonged period, which would put pressure on liquidity. We think this could be caused by lower-than-expected EBITDA growth and higher-than-expected investment needs, for example, due to operational or competitive issues. We could also lower the rating if we no longer consider that it can exceed our blended sovereign rating for DRC and Tanzania, or if we lower our ratings on these two sovereigns.”

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