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MOBILE: Cell C Long-Term Rating Affirmed at 'B-'


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Standard and Poor's Ratings Services has affirmed its 'B-' long-term corporate rating on South Africa-based mobile telecommunications operator Cell C (Pty) Ltd. The outlook is positive.

At the same time, it lowered the rating on the outstanding €160 million fixed-rate senior secured notes to 'B-' and removed the rating from CreditWatch with developing implications, where it had been placed on Sept. 15, 2010. The recovery rating on this debt was lowered to '3' from '2', indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default.

The 'CCC' rating on the outstanding $162 million senior subordinated notes was affirmed and removed from CreditWatch with positive implications where it had been placed on Sept. 15, 2010. The recovery rating on these notes is unchanged at '6', indicating our expectation of negligible (0%-10%) recovery in the event of a payment default.

The Cell C Long Term Rating and the Challenges Faced

The affirmation of the 'B-' rating reflects the opportunities but also the execution risks and business challenges of Cell C's turnaround strategy. Following the re-launching of its brand last year, in 2011 it raised the necessary vendor financing to rapidly deploy its own nationwide 3G mobile network. We still assess Cell C's business risk as "weak" and its financial risk profile as "highly leveraged".

Such material network improvement should enable the company to expand its offering into quality mobile broadband services, potentially leading to gains in market share--which has been broadly stable over past 18 months at about 15%--and churn reduction. This strategy shift could, in our view, support Cell C's earnings in the coming year. This is because there is currently very low penetration and good growth prospects for mobile broadband in South Africa.

Also, we understand that Cell C's 3G network should reach nearly full population coverage within 12 months, which could lead to a sharp reduction in its roaming costs, which have constrained Cell C's profitability in the past.

The positive outlook reflects the possibility that we could upgrade Cell C by one notch in the second half of 2012 if it can achieve material EBITDA growth--such as being on track to approach an EBITDA level of ZAR2 billion for full-year 2012--improve profitability, and make pronounced progress toward generating positive free operating cash flow. We believe increased EBITDA could stem notably from steady growth in the customer base, a reduction in current high churn rates, and better control on operating costs. The company's maintenance of sound medium-term liquidity prospects will also be an important consideration.

What the ‘B-‘ Means for the Cell C Long term Rating

The outlook also reflects Standard and Poor's expectations that Cell C will continue to receive timely financial support from its main shareholder to fund its activities and debt obligations, if needed.

We expect that Cell C will tailor the level of its network investment to available funding and address rapidly the refinancing of its outstanding senior secured bond maturing in July 2012 so as to not jeopardize the company's liquidity position over the next year.

Conversely, we could revise the outlook to stable if Cell C's liquidity deteriorates without any supporting measures from parent company Oger Telecom or if covenant headroom becomes tight (at or below 10% headroom) or if Cell C fails to significantly increase EBITDA and cash flows in the coming quarters, either as a result of competition or difficulties in executing its turnaround strategy. All of these factors attribute to the Cell C long term rating.

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