International credit ratings agency, Standard & Poor’s (S&P) says it is concerned that UK-based telecommunications services provider Cable & Wireless Communications (CWC) does not fully own its key assets in several countries, including The Bahamas, which leads to “meaningful leakage” of dividends to minority interests.
However, the ratings agency said these weaknesses are “partly offset” by the fact that CWC has management control of its key assets and there is a track record of subsidiaries steadily upstreaming dividends to CWC based on a long-established dividend policy.
S&P says the “significant” financial risk profile primarily reflects the group’s negative discretionary cash flow (DCF) over the past couple of years, owing primarily to significant shareholder returns and its significant proportionate gross leverage.
CWC has a 51 per cent stake in the Bahamas Telecommunications Company (BTC).
The Christie administration has repeatedly expressed its desire to regain the majority of the company’s shares.
“The group’s solid operating cash flow generation provides further support to the financial risk profile,” S&P said in a recent report.
“The ‘fair’ business risk profile reflects our opinion that the group continues to face a tough regulatory and competitive environment in its markets. We also view the group as being moderately exposed to country risk, for example, in Jamaica. These negative factors are offset by the group’s leading market positions in most of the markets in which it operates, solid profitability and good geographic, product and customer diversification.”
S&P projected that consolidated reported revenues will be relatively flat for 2012-2013 compared with 2011-2012 (ended March 31, 2012).
“We forecast that the reported group EBITDA margin will remain about 30 per cent. This primarily reflects our view that heightened competition in Panama will result in pressure on EBITDA margins in the mobile and broadband segments (partially due to higher subscriber acquisition costs), as well as continued erosion of fixed-line revenues due to fixed-to-mobile substitution,” the report said.
“It also reflects our view that macroeconomic conditions will likely remain challenging across much of the Caribbean, resulting in a continued drag on both revenues and EBITDA margins. These risks will, in our view, only be partially offset by continued growth in mobile data, especially in the relatively resilient Macau and Monaco & Islands divisions, where the macroeconomic backdrop continues to be supportive.”
For 2012-2013, S&P says it anticipates that CWC will continue to generate solid funds from operations (FFO) of about $660 million, up from about $610 million in 2011-2012.
“We also anticipate an improvement in free operating cash flow (FOCF) to about $270 million in 2012-2013, up from about $230 million in 2011-2012, as a result of an expected reduction in capital expenditures (capex) to about $350 million after relatively high investments of approximately $410 million in 2011-2012,” the agency said.
“These were primarily related to the deployment of high-speed (4G/HSPA+) mobile data networks in CWC’s key markets of The Bahamas, Panama, Macuau, Barbados, and The Cayman Islands; improvements in the group’s fixed broadband network, and select pay-TV investments.” S&P anticipates that the group’s DCF will turn positive in 2013-2014 as a result of the anticipated reduction in capex and lower dividend distributions.
On May 24, CWC announced plans to rebase the dividend to $0.04 per share beginning in financial 2013, down 50 per cent from $0.08 per share previously.
This is on account of global economic uncertainty that has impaired the business, especially in the Caribbean, since the demerger of CWC from Cable & Wireless PLC in 2010, and the group’s reassessment of its financial outlook.
The group estimates that the reduction in the dividend will reduce discretionary spending by approximately $100 million per year.
