Fitch Upgrades Outlook on Helios Towers to Positive
Fitch Ratings has revised the outlook on Helios Towers Plc’s (HT) Long-Term Issuer Default Rating (IDR) to positive from stable and affirmed the company ratings at ‘B+’.
In its latest rating note, Fitch has also assigned the proposed USD675 million bond to be issued by the company’s wholly-owned subsidiary HTA Group Limited a senior unsecured instrument rating of ‘B+(EXP)’ with a Recovery Rating of ‘RR4’.
According to Fitch, the notes will rank pari passu with other senior unsecured debt. It added that the company intends to use the proceeds for the repayment of its USD650 million bond due 2025 along with funding transaction costs.
“We expect the transaction to be largely leverage-neutral”, Fitch said, adding that the positive outlook reflects expectation that the company’s public commitment to reduce leverage towards 3.0x by 2026, along with focus on organic growth through increases in tenancies, will enable it to generate positive free cash flow (FCF).
Analysts also expect increase headroom for managing operating environment risks. The push out of the 2025 debt maturities through a partial tender in 2023 and the current refinancing that Fitch said it assumes would be priced without any significant increase in cost demonstrates the company’s access to capital markets.
Fitch the company’s rating strengths include HT’s leading market share in seven of its nine markets, long-term earnings and cash-flow visibility underpinned by long-term contracts, effective contract structures, and strong market-growth drivers.
Company-defined net leverage declined to 4.4x in 2023 from a peak of 5.1x in 2022, within its target range of 3.5-4.5x, the ratings update stated.
Helios Tower has announced its commitment to further de-lever to 4.0x by end-2024 and towards 3.0x by end-2026 through organic growth with no significant debt-funded acquisitions.
“We expect Fitch-defined earnings before interest tax depreciation and amortisation (EBITDA) net leverage of 4.7x in 2024, bringing the company to the low end of our 4.5x upgrade threshold”.
The global rating agency said significant shareholder-friendly policies or debt-funded acquisitions at high-multiples, although not currently factored in, would delay deleveraging and could lead to a revision of the outlook to stable.
Helios Tower has guided to organic tenancy additions in 2024 of 1,600-2,100. It typically adds 75% of new tenancies in the second half of the year and with over 760 tenancies added at March 2024.
“We expect Helios Tower to reach the top of its guidance, driving tenancy ratios through co-location”, Fitch said.
As revenues from new tenants on an existing site are higher margin than average, given minimal incremental expense an increased tenancy ratio, Fitch stated that growth will help improve free cash flow margins and lower leverage.
According to the ratings, Helios Tower operates in countries characterised by fairly weak operating environments associated with ‘B+’ and below sovereign ratings.
Fitch said even in the absence of transfer and convertibility risks, it deems the ratings of corporates operating in these markets as being somewhat anchored to the respective sovereign ratings.
“We believe that fragile economic structures and uncertain regulation may negatively affect Helios Tower’s business profile”, it added. Fitch stated that its rating thresholds for Helios Tower are consequently tighter than for peers operating in developed markets”.
The ratings said geographical diversification, manageable counterparty risk, hard currency contracts and access to international markets soften the risk for Helios Tower compared with peers.
The update stated that the company’s future cash flows are underpinned by long-term index-linked contracts with mobile network operators. At the end of March 2024, Helios Tower had USD5.7 billion of revenues secured by contracts and an average remaining life on its contracts of 7.7 years, Fitch said.
Analysts noted that the company operates in emerging market countries with sparser network footprints than in Europe or the US, where mobile penetration rates are lower and previous generation network technologies like 2G and 3G remain dominant.
“We expect growth in penetration and adoption of newer technologies to provide significant growth opportunities for tower companies in these markets as mobile network densification grows”.
Fitch stated that Helios Tower has escalators in almost all customer contracts. Analysts added that almost 50% of them have quarterly power escalators and 50% have annual power escalators, in relation to local pricing for fuel and electricity.
Helios Tower also has annual CPI escalators, with the company bearing the impact of FX increases on those contracts that are not denominated in, or linked to, hard currencies until escalators kick in.
The contract structure limits the impact on EBITDA from economic fluctuations. Failure to renew contracts, pricing pressures at renewals and increased competition could pressure the rating.
In the rating note, Fitch said the company remains exposed to evolving regulatory regimes, which are characterised by frequent changes and strict compliance requirements.
The regulatory risk is somewhat mitigated by diversification, analysts noted, estimated that 56% of 2024 revenue will come from either dollarised countries or from countries where the currency is euro- or dollar-pegged, while another 19% is contractually linked to hard currencies.
This is expected to mitigate the risk of adverse FX movements substantially. Fitch said in Tanzania and Ghana, just over 40% of revenue is linked to hard currencies.
The rating note stated that the Tanzanian shilling has been stable against the dollar in recent years but as Helios Tower’s largest market, a currency depreciation would have a more significant impact for HT and could constrain EBITDA growth.
The company remains exposed to the risk of de-dollarising or de-pegging of the local currencies, which could impact EBITDA, according to Fitch Ratings.
However, its exposure to multiple local currencies, strategy of keeping excess cash in US dollars, gradually converting capex vendor contracts to local currencies and using substitutes to dollars such as rand or euros helps mitigate the FX risk, the rating note added. ECOWAS Bloc Emerging Tourist Destination —Official
