Bad news for Cell C

ADSL South Africa (Broadband South Africa), 17 May 2007

Bad news knocked on Cell C’s door after Moody’s Investors Service downgraded its ratings and ‘…also continued to maintain a negative outlook on all ratings” (Cell C’s ratings drop, I-Net Bridge, 15 May 2007).
 
What precisely happened?
 
Good question.
 
The following happened:

• FB3 to Caa1 – Moody’s downgraded Cell C’s corporate family rating from B3 to Caa1. 

• B2 to B3 – ‘EUR400 million senior secured notes due 2012 downgraded to B3 from B2…’ (Cell C’s ratings drop, I-Net Bridge, 15 May 2007). 

• Caa2 to Caa3 – ‘270 million senior subordinated notes due 2015 downgraded to Caa3 from Caa2…’ (Cell C’s ratings drop, I-Net Bridge, 15 May 2007). 

• Overall outlook – ‘Outlook on all ratings remains negative’ (Cell C’s ratings drop, I-Net Bridge, 15 May 2007).
   
  In other words, Moody’s must have been real moody because Cell C’s ratings clearly took a real good beating.  

All jokes aside, why the negative ratings?
 
Continued weakness.
 
‘The rating actions result from continued weakness in the company's business and financial profile relative to initial expectations following the release of full year results to December 2006’ (Cell C’s ratings drop, I-Net Bridge, 15 May 2007).
 
In other words, Cell C got negative ratings because the company’s business and financial profile looked worse than earlier anticipated.
 
Why the weaker position?
 
Combination of factors.
 
A list of factors:

• Business plan – ‘Cell C faces challenges to implement a business plan that incorporates aggressive assumptions growth in subscribers to address the deterioration in financial and operating performance’ (Cell C’s ratings drop, I-Net Bridge, 15 May 2007).
   
  In other words, Cell C is finding it difficult to implement a business plan that’s based on ambitious assumptions and Moody’s ratings reflect it.  

• Liquidity & financial flexibility  – ‘Cell C has weak liquidity headroom and very limited financial flexibility’ (Cell C’s ratings drop, I-Net Bridge, 15 May 2007).
   
  In other words, Cell C’s debt paying ability is not good and things also don’t look too good in terms of financial flexibility.  

• Capital structure – ‘The company's highly leveraged capital structure with Total Debt/EBITDA of 10.9x (prior to adjusting for capitalisation of subscriber acquisition costs) and consequently the potentially increased exposure of Cell C's creditors to higher default risk and lower recovery levels’ (Cell C’s ratings drop, I-Net Bridge, 15 May 2007).
   
  In other words, Cell C’s total debt is overshadowing the company’s EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), which cannot be a good thing especially since Cell C up to date failed to lift EBITDA or bring down total debt in healthy chunks.  

• Joint Venture with Virgin Mobile – ‘VMSA (the 50/50 Joint Venture with Virgin Mobile) has underperformed initial expectations for attracting subscribers and making progress towards profitability’ (Cell C’s ratings drop, I-Net Bridge, 15 May 2007).
   
  In other words, the joint venture with Virgin Mobile has so far come short of expectations.  

• Churn rate – ‘The high rate of churn continues despite management's assertions that these rates were temporary in 2005. Cell C had a 96% churn rate for prepaid subscribers and incurred a 2.9% loss in the number of pre-paid customers in 2006’ (Cell C’s ratings drop, I-Net Bridge, 15 May 2007).
   
  In other words, things don’t look rosy where prepaid subscribers are of a concern. 

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