Vodacom hedges SA downgrade

Amid mounting expectations of more credit ratings downgrades for SA, Vodacom said on Monday that it had increased its fixed-rate borrowings from 20% to 50% of debt to hedge against this risk.

CEO Shameel Joosub said the mobile network operator had made the adjustments in early 2017.

Fitch and S&P Global Ratings withdrew SA’s investmentgrade status in April and economists expect further downgrades and higher borrowing costs. S&P and Moody’s are to announce their rating reviews on November 24. Moody’s is the only ratings agency that has SA one notch above subinvestment grade.

Johann Els, senior economist at Old Mutual Investment Group, said “the lack of plans for fiscal consolidation and reining in the debt ratio means that SA’s local currency credit ratings will likely be cut to junk status within weeks”.

He said multiple downgrades within the next six to 12 months “are very likely”.

“There will certainly be a downgrade,” said Alexander Forbes Investments’ chief economist, Lesiba Mothata.

“We are expecting Moody’s to drop us at least one notch on local currency, placing us in junk status, because of continued fiscal uncertainty.”

Vodacom’s share price fell 3.4% to R147.34 on Monday after the group reported that headline earnings per share rose 1.1% in the six months to September.

Net profit was up 7%, boosted by the acquisition of a 34.9% stake in Kenyan operator Safaricom in August.

Data revenue in SA grew 15% to R11.4bn, or 42.6% of service revenue, to overtake the contribution from voice revenue for the first time.

Joosub said data revenue was expected to account for about half of Vodacom’s turnover in SA within the next three years and 60% of domestic revenue in the longer term.

While data revenue growth slowed in SA in the second quarter, largely as a result of promotions, these had “changed customer behaviour and we’ll see the benefits going into the future”. Meanwhile, Joosub said that Vodacom’s contract to

supply mobile communication services to government departments was progressing “slower than expected”, though several departments were on board.

This contract has come under the scrutiny of the Competition Commission.

Joosub said Vodacom had met with the regulator and was “providing them with information and co-operating”.

Vodacom and other operators were also in talks with the state on spectrum constraints in SA, which were partly the result of delays in the country’s migration to digital television. “Industry is engaging with government and having discussions about how to progress things, and also offering to help in terms of the digital migration itself,” Joosub said.

Given that the lack of available spectrum meant substantial investments in base stations were needed amid surging data demand, Vodacom recently entered into a roaming agreement with Rain.

The arrangement “gives us breathing room”, Joosub said.

Vodacom also operates in Lesotho, Mozambique, Tanzania and the Democratic Republic of Congo.