Ratings agency Moody’s Investors Service expects Telkom’s performance to improve over the coming year-and-a-half, which would help to improve its credit metrics, but the ratings agency didn’t give the telecom operator the benefit of the doubt entirely.
In a note on Wednesday, Moody’s affirmed Telkom’s corporate family rating of Ba2 but downgraded its national scale rating (NSR) to Aa2.za from Aa1.za.
As an entity that is held mostly in government hands, through the state’s direct 40% stake and the 15% held by the Public Investment Corporation (PIC), ratings agencies often view Telkom’s prospects factoring in government influence and sovereign risk.
The outlook on all ratings remains stable, according to Telkom, which has been the subject of a number of merger and takeover attempts over the past year.
Credit ratings from Moody’s and rivals S&P and Fitch play a critical role in facilitating efficient capital allocation within the financial system. They provide valuable information for investors and borrowers about an entity’s ability to service its loans.
The NSR downgrade reflects Telkom’s weakly positioned Ba2 rating in comparison with similar-rated SA companies, the group said.
Moody’s affirmed Telkom’s baseline credit assessment at Ba2, “which is supported by its leading market position in SA’s fixed-line business and operator of the largest fibre network, and adequate financial policies”.
“Moody’s rating action reflects its 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.”
In August, S&P downgraded its stand-alone credit rating on the group, headed by CEO Serame Taukobong, from BBB- to BB+. “reflecting the company’s weaker expected financial measures”, the agency said at the time.
The stand-alone rating excludes S&P’s view of government influence and sovereign risk.
While S&P took into account that adjusted funds from operations (FFO) to debt declined in 2023 to about 33% from 63% in 2022, it noted lower earnings generation and the fact that free operating cash flows turned negative and adjusted debt increased.
“Though we expect gradual improvement in Telkom’s FFO in the 2024 to 2026 fiscal years, we expect the company’s financial performance to remain below our previous expectations.”
S&P gave a BB long-term issuer credit rating on Telkom, with a stable outlook.
In November, Telkom’s management told Business Day it is confident that the fixed-line group can fund its development of telecom infrastructure.
Telkom is working to capitalise on its vast trove of telecom assets through a plan similar to that of former CEO Sipho Maseko, who made a bid to take control of the group earlier in 2023.
In July, Telkom rejected Maseko’s bid, for which he had amassed a R12bn war chest with Mauritian-based telecom company Axian Telecom. Telkom expressed doubts about the investment consortium’s ability to execute and fund a proposal that would see Telkom’s fibre, cellphone towers and data centre assets combined with those of Axian to create a pan-African telecom infrastructure group.
The group reported that its net debt stood at just less than R18.2bn in the six months to end-September, up 8% from the previous comparable period. This translates to a net debt to earnings before interest, tax, depreciation and amortisation ratio of 1.8 times.
The period ended with the group holding cash of R3.6bn and unused facilities of R4.6bn.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.