The affirmation of Liquid Telecom’s B1 CFR reflects the significant ramp up in revenues and EBITDA generated in South Africa over the last twelve months which has contributed to offset the challenges that the company faces in Zimbabwe as a result of the sharp depreciation of the local currency and difficulties in repatriating cash. The EBITDA contribution from Zimbabwe reduced to 14% in the last twelve months (LTM) ending 31 May 2020 from 32% in the 2019 fiscal year ending 28 February. This contribution is expected to reduce towards 5% in 2021 driven by the continued devaluation of the Zimbabwe currency (Real-Time Gross Settlement, “RTGS”) against the US dollar and growth from the rest of the operations.
The affirmation reflects the benefits of a diversified business across 13 African countries that have enabled Liquid Telecom to withstand a decline in financial performance from its Zimbabwe operations. While Liquid Telecom will continue to benefit from the strong demand for its telecommunication services across Africa, leverage and interest cover metrics remain susceptible to local currency fluctuations against the US dollar.Dion Bate, Senior Analyst, local market analyst and VP
The affirmation of the rating also reflects a decline in gross leverage excluding Zimbabwe. Moody’s adjusted debt to EBITDA fell to 4.3x in LTM May 2020 from 6.0x in fiscal 2019. This ratio is likely to trend towards 4.0x in 2021 which is a level appropriate for the B1 rating. Moody’s assesses the company’s leverage and liquidity excluding Zimbabwe because the difficulties in accessing US dollar and transferring cash out of the country continue and this cash flow cannot be reliably used to service debt. Including the EBITDA from Zimbabwe, gross leverage was 3.8x for LTM May 2020.
The strong performance from the South African operations during fiscal 2020 has resulted in the revenue contribution to the Group increasing to 53% as of LTM May 2020 from 40% in fiscal 2018. This is credit positive because South Africa (Ba1 negative) is rated higher than the bulk of the African countries in which Liquid Telecom operates. However, the company remains exposed to currency risk given the large currency mismatch between its local currency cash flows and US dollar debt obligations. Moody’s estimates that around 74% of the Group’s EBITDA is earned in local currencies, namely the South African rand (53% of consolidated EBITDA before eliminations), Zimbabwe RTGS $ (14%), and other local African currencies (7%). A depreciation of these local currencies against the US dollar, specifically the South African rand, will increase leverage and depress interest cover ratios beyond current levels.
In the context of the coronavirus outbreak, the operational impact for Liquid Telecom has been limited as the company is considered an essential service by governments across Africa and its operations have not been restricted by the lockdowns. Moody’s expect Liquid Telecom’s services will be one of the few beneficiaries of the pandemic because of the increased use of connectivity and data consumption as businesses evolve to remote working environments.
The negative outlook reflects the macroeconomic challenges that South Africa and other African countries face and which have already triggered a depreciation of their currencies against the US dollar. This is likely to create some volatility in the company’s credit metrics as well as lead to a more challenging business environment. The outlook also reflects the approaching maturity of the outstanding bond in 2 years which would put pressure on the rating if not addressed in a timely manner.