S&P Global Ratings has downgraded Cell C’s debt to “D”, or “default” — its lowest-possible “junk” rating — after the financially distressed mobile operator “failed to make interest payments on certain bilateral loan facilities” due last month.
The operator’s woes continue to hurt the share price of its largest shareholder, JSE-listed Blue Label Telecoms, which plunged to new lows on Thursday below R3/share — it closed the day’s session at R2.78 after earlier dropping as low as R2.71.
“We understand that Cell C has suspended future interest payments pending the conclusion of its operational and balance sheet restructuring,” S&P Global Ratings said in a statement. “We consider both the missed payments and suspension of future payments as a general default.”
It lowered its rating on Cell C to “D” from “SD”, or “selective default”, and lowered its rating on the operator’s senior secured term loan to “D” from “CC”.
“The downgrade follows Cell C’s announcement on 19 August that it has failed to make approximately R194 million in interest payments due in July 2019 on certain bilateral loan facilities totalling 40% of its total debt at December 31, 2018,” the rating agency said.
“It also reflects our expectation that the company will not make these payments within the 30-day grace period due to its decision to suspend future payments. We believe there is an increased likelihood that Cell C will be unable to repay all or substantially all of the obligations as they come due, unless it is able to restructure its debt and recapitalise its balance sheet.
‘Event of default’
“This non-payment of interest has triggered an event of default under cross-default conditions included in Cell C’s other bilateral loan facilities’ agreements and the indenture governing the $184-million senior secured notes due in 2020,” it said. “This leaves Cell C exposed to the possibility that bilateral lenders and noteholders will exercise their right to accelerate repayment of their facilities.”
S&P noted, however, that no bilateral lenders have yet exercised this right and it understands the situation with noteholders is developing following Cell C’s announcement. “Cell C does not have sufficient liquidity to cover a potential acceleration event or meet its ongoing interest obligations. We understand the company remains engaged with its lenders to restructure terms and resolve the default.”
Cell C and Blue Label Telecoms have said that they are at an advanced stage of talks with the Buffet Consortium, led by billionaire South African property mogul, for a recapitalisation of the mobile operator.
“Cell C recently announced a non-binding term sheet to extend its national roaming agreement with mobile network operator MTN Group, which we understand is a major condition precedent for this transaction,” S&P said in its statement. “Nonetheless, we believe there are still various steps that need to be completed prior to recapitalisation, including the signature of a binding long-form agreement with MTN Group, possibly shareholder and regulatory approvals, and the restructuring of bilateral facilities.”
In response to S&P’s downgrade decision, Cell C said the suspension of interest payments in July forms part of “wider Cell C initiatives to improve liquidity and to restructure the company’s balance sheet”.
“Cell C continues to work proactively with all stakeholders to improve its liquidity, debt profile and long-term competitiveness as part of its strategic roadmap,” it said.
It added that the pending roaming agreement with MTN will allow it to better control its capital expenditure and operating costs.
“An agreement will lay the groundwork for a broader national roaming agreement, supporting South Africa’s policy goals of avoiding network duplication. The network services provided will drive efficiencies in the delivery of services to its consumers by Cell C. The expanded roaming agreement together with the recapitalisation transaction will advance Cell C’s path to sustainability.”
Cell C CEO Douglas Craigie Stevenson said the company is “committed to simplifying the business model, and right-sizing and optimising the business”.
“We have engaged with S&P throughout this process and believe we are on the right track with the transactions currently being finalised.”
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