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Fitch Ratings has downgraded South Africa-based telecoms group MTN Group Limited's (MTN) Long-term Issuer Default Rating (IDR) to 'BBB-' from 'BBB'. The Outlook is Stable. All National ratings for MTN have been affirmed and a full list of rating actions is available at the end of this commentary.


The downgrade follows the recent rating action on South Africa's sovereign ratings (see 'Fitch Downgrades South Africa to 'BBB-'; Outlook Stable dated 4 December 2015 on www.fitchratings.com), which is considered together with the impact from recent announcements from the group regarding the fine from NCC, the Nigerian telecoms regulator. Both of these are assessed to have increased operational risk to MTN from its two key markets.



Emerging Market Risks

The downgrade of South Africa highlights the macroeconomic risks to groups focused on emerging markets while the fine and challenges in Nigerian dividend repatriation also evidences higher operational/regulatory risk in these regions. We believe these changes result in increased credit risk to MTN given its reliance on emerging markets, and its exposure to South Africa and Nigeria, in particular.


South Africa Sovereign Downgrade

While MTN's rating is not directly linked to that of the South African sovereign, the downgrade of South Africa highlights an increased operational risk to the group from one of its two largest markets.


Nigerian Fine

On 3 November 2015 the group was notified that the NCC had reduced the fine by 35% to USD3.4bn; however, on 4 December the regulator clarified that the fine was reduced by 25% to USD3.9bn. Currently there remains a lack of clarity on both the method of calculation of the fine reduction and uncertainty as to whether management will be able to agree an altered payment structure or deadline for the fine. However, initial communications from the NCC indicate limited reductions and a short timeframe, which increases risk to MTN Nigeria.


Management have confirmed that any fine levied by the NCC will be applied to MTN Nigeria and that any funding required to meet the settlement will be raised locally by MTN Nigeria. While this limits the impact to the Nigerian operations, any significant reduction in profitability of MTN Nigeria will significantly influence the group given the scale and importance of this market to MTN.


Reduced Dividends from MTN Nigeria

In MTN's 3Q15 results call, management highlighted the difficulties the group faces in remitting dividends from MTN Nigeria to the parent company. This is due to the Nigerian central bank's policy of maintaining the Naira peg to the US dollar, which is limiting foreign exchange liquidity. The resulting liquidity squeeze has been short term. However, if there is no evidence of an improvement in liquidity from the Nigerian operations, it will result in negative rating pressure.



Fitch's key assumptions within the rating case for MTN include:

- Low single-digit revenue and EBITDA CAGR from 2014-2018.

- Capex-to-revenue of 21% in 2015, declining to 16% in 2018.

- Management will adjust dividend policy and capex to keep leverage within the 'BBB-' threshold following any fine levied by the Nigerian regulator.



Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Consolidated funds from operations (FFO) adjusted net leverage sustainably above 2.5x (2014: 0.9x).

- If consolidated FFO adjusted net leverage approaches the 2.5x threshold, net debt/EBITDA at material operating subsidiaries (most notably MTN Nigeria) approaching the group average would put pressure on the rating.

- Pressure on operating cash flow in MTN's key markets driven by increased regulatory and competitive pressures or increased capital expenditure.

- Expectations of a reduction in dividends received from the operating subsidiaries that would lead to an increase of leverage of the South Africa operations (including the parent company). On an unconsolidated basis and using Fitch's estimate of dividends received from these opcos, net debt / EBITDA plus dividends for South Africa including the parent company over 2.5x (2014: 1.5x) would put pressure on the ratings.


Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- An upgrade is unlikely in the short term, due to MTN's significant exposure to countries with high political and regulatory risk. MTN is unlikely to be rated higher than the South African sovereign rating.