How Moody’s rated IHS*

On 28 October 2016 IHS Netherlands Holdco B.V., which owns 100% of IHS Nigeria Ltd, announced the successful launch of an $800mn high yield corporate bond issue which was listed on the Irish Stock Exchange. The bond, with a 9.5% coupon and a maturity date of 2021, is the largest high yield corporate bond to come out of Africa outside of South Africa and was assigned a Ba3 rating by Moody’s. In conjunction with the rating of the bond, Moody’s also assigned a B1 corporate family rating to IHS Netherlands Holdco B.V. which provided interesting insights into the assessment of the Sub-Saharan towerco business by this ratings agency. TowerXchange examine Moody’s credit assessment of the towerco.

IHS Netherlands Holdco B.V. and IHS Holdings Ltd

In order to examine the rating of IHS by Moody’s it is first important to understand the organisational structure of the company. IHS Netherlands Holdco B.V. is a subsidiary of the broader tower group IHS Holding Limited and owns 100% of IHS Nigeria Ltd and 100% of IHS Towers NG Limited (formerly known as HTN Towers, the acquisition of which was completed on 10 June 2016 earlier this year) - see figure one. IHS Netherlands Holdco B.V. owns 6,351 towers in Nigeria and also has full operational control of IHS’ 9,038 towers which were formerly part of the towerco’s joint venture with MTN [NB since the time of writing, MTN has restructured its share in the joint venture to additional shares in IHS Holding Limited, taking their total shareholding in the company to 29%]. IHS Holding Limited owns 22,961 towers across five markets (see figure two).

The issuance of a US$800mn bond

The $800mn high-yield corporate bond with a 9.5% coupon was issued by IHS Netherlands Holdco B.V. and was listed on the Irish Stock Exchange, with a high level of demand from investors, including those that had not previously placed investments in the asset class. The bond was assigned a Ba3 stable rating by Moody’s, one notch above the B1 rating given to IHS Netherlands Holding B.V. In rating the bond, Moody’s took into the account the nature of the capital structure of the company which included a deeply subordinated amount of shareholder debt. Given the substantial junior component in the capital structure representing around 50% of total debt Moody’s assigned a one notch higher rating to  the bond compared to the company reflecting a rate of recovery above B1 for bond holders under the rating agency’s loss given default assessment.

Commenting in the press release announcing the bond, Issam Darwish, Executive Vice Chairman and CEO of IHS said “We are delighted to have completed the largest high yield corporate bond ever issued out of Africa [excluding South Africa]. This is a major milestone for us, refinancing IHS Nigeria and IHS Towers NG Limited’s (formerly known as Helios Towers Nigeria Limited) existing debt and underwriting the build programme of new towers. The quality investor demand is a testament to IHS’s strong business fundamentals.”

Factors contributing to Moody’s rating of IHS

1. Confidence in the towerco business model 

In Moody’s assessment the towerco model in general with its annuity-like contracted cash flow streams is an attractive and low risk business model. The ability to forecast revenues with a high degree of certainty due to the long term contracts in place helped contribute to IHS’ B1 rating.  Contrast this to an industry such as the retail sector with highly variable revenues and the towerco business model has a much lower credit risk.

2. Counterparty risk

At the time of Moody’s rating, over 90% of IHS Netherlands B. V.’s revenue came from MNOs whose parent companies had credit ratings of Baa3 or higher. Bharti Airtel was rated Baa3 stable and MTN was rated Baa3 (although with a negative outlook). Etisalat was one of the highest rated MNOs globally with an Aa3 negative rating [stop press: since the original rating was made and this article written, Etisalat has exited the Nigerian market following the takeover of its opco by a consortium of lenders following the loan default].

Whilst IHS’s contracts are normally signed with the local opcos whose credit risk would likely be higher than their parent companies, Moody’s took into account the parent company ratings. With IHS having agreements in place with each of the operators in at least two different countries, they felt that the likelihood of a default by the local opco would be low; should the MNO lapse on one contract it would put them at risk as IHS pulling the contract in the other country and as such, the parent company would most likely step in [Stop press: IHS continue to pursue outstanding lease payments since Etisalat’s exit from the market].

3. Liquidity metrics

With access to a Nigerian Naira equivalent capex facility of up to US$150mn and a US$69mn undrawn facility on a subordinated US$900mn intercompany shareholder loan, Moody’s felt that IHS, along with their operating cash flow and existing cash balances, had sufficient liquidity to meet their new site rollout and tower maintenance plans for the years ahead. What’s more, the ability of IHS to delay expenditure in the short term if so required offered further confidence in the company’s ability to meet its liquidity requirements.

The strong committed financial support from parent company, IHS Holdings Limited was a key factor in improving the rating of the restricted company. A history of equity injections via the US$900mn intercompany shareholder loan facility gave the reassurance that broader group financial support would be forthcoming should the need arise.

4. Operational experience

IHS’ history of operating towers in not only in Nigeria but also in four other African markets via their parent company has helped the company refine best practice and excel as a tower operator. Optimising services including power provision, security and maintenance has enabled IHS to reach an average uptime of 99.47% in 1H16 across their Nigerian portfolio.

Whilst the company is exposed to a degree of integration risk as the HTN Towers portfolio is fully incorporated into IHS, their good understanding of the portfolio and the Nigerian market, experience in integrating other assets, and use of single portfolio strategy to sell tower services across all sites in Nigeria (including the joint venture with MTN) helps offset some of this risk.

5. Management team

Much of the company’s management team has been with IHS since their inception back in 2001 and has a history of managing towers through tough operational and financial conditions across multiple African markets.

6. Scale of revenue and growth potential 

Based on Moody’s assumption that IHS will generate revenues of $428mn in 2017, their rating was constrained by the limited scale of this revenue. IHS Netherlands B.V.’s technology tenancy ratio currently sits at 1.9 but given the extent of network expansion forecasted in Nigeria, this is likely to increase, adding significant cash generation growth potential for the company.

MTN Nigeria have announced ambitious growth plans which includes the addition of 3G and 4G infrastructure to 7,345 existing towers as well as the addition of 3,904 new sites by the end of 2017. As part of this, IHS has been awarded a build-to-suit program involving the addition of 1,650 new towers as well as the addition of approximately 2,000 tenancies to existing sites.

It is highly likely given MTN’s extensive network rollout that other MNOs in the market will look to follow suit, which will provide further revenue opportunities to IHS and offer further upsides to their ratings.

Hardiman Telecommunications Ltd forecast that the number of points of presence and technology tenancies for the restricted company will grow by over 51,000 (figure four) in the next four years.

7. Debt/EBITDA ratio

IHS has a high debt/EBITDA of 8.2x (or 5.2x excluding the intercompany shareholder loan which exhibits certain equity-like characteristics). The predictability of revenues from a towerco business model however allow for a greater comfort level with such a debt/EBITDA ratio, thus reducing the downward pressure on IHS’ rating. Moody’s rating however does presume IHS’ deleveraging toward 6.5x (or 3.6x excluding the intercompany shareholder loan) by 2017.

8. Corporate governance strategies 

Following investment in IHS by both the World Bank (Moody’s; Aaa stable) and the IFC (Moody’s; Aaa stable), IHS undertook significant steps in order to ensure that their corporate governance policies were in alignment with international best practice. Putting in place processes to prevent bribery and corruption whilst implementing a robust workplace code of conduct has further strengthened IHS’ credit profile.

9. Sovereign risk 

Whilst present in five countries, the restricted company rated by Moody’s was solely exposed to the Nigerian market, a country with significant political and economic challenges. The country has however undergone a successful democratic transition following general elections in March 2015 and is the largest economy in Africa, based on purchasing power parity basis. What’s more, the regulatory, political and economic environment is favourable for towercos at present. Moody’s corporate family rating of IHS Netherlands B.V. is B1, the same as their rating for the Nigerian government.

10. Currency risk

The depreciation of the Naira in June of this year hit IHS hard as exchange rates tumbled following the Nigerian Central Bank’s decision to drop the currency peg that had kept exchange rates artificially high for over a year. Directly after the peg was removed, the value of the Naira fell by 60% against the US dollar and has remained volatile since.

To minimise the impact of forex fluctuations, IHS has agreed the transition to more regular resetting of the US dollar - Nigerian Naira conversion.  At present, 23% of contracts are set on a quarterly basis, with 6% semi-annually and 49% annually. By 2018 this will have transitioned to 48% of contracts being set quarterly, 6% semi-annually and 18% on annual basis.

11. Diesel and power 

Excluding the cost of depreciation and amortisation, the cost of power represented 48.7% of IHS’ cost of sales at 30 June 2016. Whilst after escalations in the past year, diesel prices have largely flattened out, exposure to increases in fuel prices remains a risk to IHS’ profits.

One major positive step that IHS have taken is to reduce their dependency on diesel. IHS has invested a large amount of capital in replacing ageing generators with solar-hybrid solutions leading to significant savings in diesel usage, a move which has also had a positive impact on their credit rating.

12. Ground lease payments and contracts

IHS own the ground under just 15% of their sites in Nigeria which opens the towerco up to risks surrounding lease renegotiations. Failure to renew a lease would require the towerco to relocate their site, although since 2012 only three sites have had to be moved as a result of failure to extend a lease agreement, and as such rent escalations represent the largest concern. With lease payments paid upfront in lump sums, typically five or ten year periods, this could cause certain cash-flow constraints around the time that the lease is due.

The rating of IHS was not only Moody’s first rating of a towerco in Africa but also their first rating of a towerco in EMEA, thus precluding direct comparisons in the region. Having rated towercos in both the Asian and US markets however, Moody’s were able to share interesting insights into how various factors have led to the derivation of different risk profiles.

In the Indonesian tower market, Moody’s have rated Protelindo (Baa3) and Tower Bersama (Ba3), both higher than IHS’ B1 corporate family rating, largely due to the differences in sovereign risk; Indonesia’s is rated as an investment grade country at Baa3, four notches above Nigeria’s rating of B1. A difference in scale is another element which accounts for the difference the ratings. Moody’s rating of IHS applied to the restricted company only (although the broader group was taken into consideration); IHS Netherlands Holdco B.V. owns 6,351 towers whereas Protelindo and Tower Bersama own 14,476 and 11,389 towers respectively. One similarity between IHS and Tower Bersama was their leverage levels, however the differences in sovereign risk, scale and a longer track record of operations and regulatory framework in the case of Tower Bersama weighed more heavily on the ratings.

When it comes to the US based towercos rated by Moody’s, the US’s Aaa rating is a major factor which accounts for the difference in ratings between them and IHS. When considering a towerco such as American Tower (“AMT”), however, there are several other key factors which lead to their Baa3 profile.

American Tower’s greater geographic diversification is one of these differentiating factors. American Tower owns and operates a portfolio of approximately 144,000 tower sites across five continents and 13 countries.

AMT’s commitment to operating with moderate leverage is another key consideration supporting its Baa3 rating. Although acquisitive, the REIT is committed to operating within its stated net leverage target range of less than 5x (or less than 6x including Moody’s operating lease adjustment).

Importantly, American Tower’s credit profile benefits from the high visibility into future earnings. American Tower’s leases are typically non-cancellable and include an initial term of 5 to 10 years with multiple 5-year renewals that provide an average 3% annual escalation in the U.S. and a typically inflation-adjusted escalator internationally. American Tower’s non-cancellable contracted tenant lease revenue stood at approximately $32 billion as of September 30, 2016, that represents nearly seven times its 2015 property revenue.

Moreover, AMT benefits from favourable land interest attributes. AMT owns roughly 28% of the land under its U.S. sites but over 67% of AMT’s domestic tower are located on owned land or have a ground lease with at least 20 years until renewal. Upon extension, average increase in lease terms are typically 25-30 years or more, and the average remaining ground lease term is nearly 25 years until final maturity in the U.S. In addition, AMT’s landlord base is highly fragmented, with approximately 90% of ground leases held by landlords who own a single site.

AMT elected REIT status beginning in 2012, and the ratings agency views AMT’s corporate profile as having more property like credit characteristics.

These credit strengths are counterbalanced by American Tower’s high tenant concentration, especially within its domestic market. The rating is also constrained by AMT’s exposure to the risks of major technological transformation and untested alternative use for its properties should such dramatic changes occur - risks that are not typically associated with traditional REITs.

SBA Communications, which has the same B1 rating as IHS, owned 25,878 tower sites as of September 30, 2016. Though SBA does not own the majority of the land beneath its sites, approximately 70% of its towers are located on land that it owns or controls for more than 20 years via long-term ground leases or perpetual easements. The majority of SBA’s sites are located in the US (Aaa stable) and leased under long-term contracts to the largest US wireless providers with a concentration to solid counterparty credits, including Verizon (Baa1 stable), AT&T (Baa1 review for downgrade) and T-Mobile (Ba3 stable). SBA is subject to a modest amount of currency exchange risk with roughly 10% of revenue generated in non-US dollar currencies, primarily the Brazilian Reais. SBA’s rating is the same as IHS, due in large part to its elevated leverage profile, which is around 8x total debt to EBITDA on a Moody’s adjusted basis.

Three of sub-Saharan Africa’s towercos are privately owned but largely viewed to be gearing up for some kind of liquidity event in the next 18 months. Many feel that IHS’ size precludes a trade sale and that an IPO is the most likely exit for the towerco. Whilst rumours are currently circulating that IHS are gearing up for an IPO (the bond is thought to be a precursor to this), the company has suggested that this is just speculation at present.

Sovereign, currency and counterparty risk, revenue, liquidity and leverage levels, management team and operational experience, ground site ownership and oil price exposure are just some of the factors taken into consideration. IHS have made considerable steps towards offsetting some of the perceived risks, steps which other towercos may well look to follow in a bid to increase their attractiveness to investors.

Whether now would represent a good time for IHS to IPO is up for debate, especially given the market dynamics following Etisalat’s exi.  Whilst success stories such the listings of Cellnex and Inwit in Europe have created waves in the public markets, the recent cancellation of the Telxius IPO by Telefónica and postponement of Global Tower’s IPO by Turkcell also suggests that there is currently a suboptimal market for towerco listings.

TowerXchange would like to thank Moody’s investor’s Service for their input into the article. Viewpoints represent those of Moody’s or TowerXchange, with the article having being completed independently of input from IHS