By Lehlohonolo Lehana.
Ratings agency Moody’s Investors Service affirmed Telkom’s corporate family rating of Ba2 but downgraded its national scale rating (NSR) to Aa2.za from Aa1.za.
The NSR downgrade is reflective of Telkom’s weakly positioned Ba2 rating in comparison to similar rated South African companies.
Moody’s also affirmed Telkom’s baseline credit assessment at Ba2, which is supported by its leading market position in South Africa’s fixed-line business and operator of the largest fibre network, and adequate financial policies.
The ratings action reflects the agency’s expectation that Telkom’s credit metrics will recover over the next 12 to 18 months to levels that Moody’s deems adequate for its Ba2 rating.
At the same time the company’s debt increased by 25% over the 18 months from March 2022 to September 2023 to fund negative free cash flow.
“Combined with rising interest rates that have increased the company’s weighted average cost of debt, including leases, to 8.5% for the 12 months that ended September 2023 (September 2023 LTM) from 7.15% as of March 2022, this has led to a 54% increase in interest expense and a weakening of the (Ebitda – capex) / interest expense ratio to 1.0x as of September 2023 LTM, down from 2.4x 18 months earlier,” it said.
Moody’s said it deemed an Ebitda – capex / interest ratio below 2x as weak for Telkom’s Ba2 rating, even though it was partially mitigated by debt/ Ebitda leverage of 2.2x as of September 2023 LTM, which remained adequate despite weakening from 1.5x 18 months earlier.
The rating agency expected that Telkom’s Ebitda would recover to around R11 billion over the next two years from R9.6 bn as of September 2023 LTM thanks to cost saving measures and the normalisation of expenses from the expansion of the postpaid book in financial year 2023.