Details emerge of Cell C recapitalisation plan

Beleaguered mobile operator Cell C delivered its latest restructuring proposal to creditors in early October, said two people familiar with the matter. The highly leveraged company fell into default in July last year, after failing to pay interest on various bilateral loans.

Under the terms of the proposed transaction, existing airtime lenders will provide about R4.25-billion in new super-senior debt, said both people. At the end of June 2020, lenders Rand Merchant Bank and Absa were owed R902-million in debt collateralised by Cell C airtime.

The new debt will be secured by a significant portion of Cell C’s assets, excluding spectrum, according to the first person. The fresh money is set to be raised through the so-called Gatsby SPV transaction, said the second person. In May, South Africa’s competition authority gave the nod for certain Cell C assets to be transferred to a newly established vehicle called Gatsby SPV.

Under the transaction, airtime-backed lenders will effectively be made whole, said the first person. Cell C is offering its other senior secured creditors the option of either a cash-out at a heavy discount or a partial reinstatement of debt and some equity upside in the business, said the people familiar with the offer.

A major priority for the company will likely be reducing a currency mismatch in its debt portfolio, noted an equity analyst away from the situation. “Cell C absolutely have to get rid of their non-rand-denominated debt. (The company) took over a R1-billion foreign exchange hit (in the first half of 2020).

“I can only envisage a debt-for-equity swap. They can’t create alchemy. The only way it may work is if they dramatically reduce their interest payment,” the analyst continued.

End-October deadline

The senior secured creditor committee, holding some R8.4-billion-equivalent debt at end-June 2020, comprises holders of Cell C’s defaulted 8.625% 2020 bonds, China-based lenders CDB and ICBC, as well as the Development Bank of Southern Africa and Nedbank, said both people familiar.

Bondholders on the committee include US fund Gramercy and Lebanese lenders Bank Audi and Bankmed. Other funds invested in the bonds are Bank of America and GoldenTree, according to the people.

Cell C has asked creditors to respond to the proposal by the end of the month, noted the first person. Following transaction completion, the company would be left with between R6-billion and R8-billion in total debt, the person added.

Deloitte acts as Cell C’s financial advisor and PwC acts as an operational restructuring advisor, according to shareholder Blue Label Telecoms’ annual report. An investment committee advising on the recapitalisation is chaired by former Investec CEO Stephen Koseff. Blue Label Telecoms is advised by Houlihan Lokey, said both people, and senior secured creditors are advised by Moelis.

“This is a complex restructure, with multiple stakeholders. Good progress is being made. However, Cell C will not be commenting until the transaction is completed,” the company said when reached for comment.

Cell C has been locked in a long-running debt crisis, having last restructured via a US chapter 15 process in 2017. That previous transaction saw JSE-listed Blue Label take a 45% stake in the business and Net1 UEPS Technologies take 15%. Both investors last year wrote down their investment in the company to zero.

The company – hit by strikes this month as it seeks to lay off workers – has been engaged in transforming itself away from an infrastructure provider, after having agreed to an extended roaming agreement with MTN last year.
Meanwhile, recent press reports suggest Cell C is seeking to transfer its prepaid customer book to Blue Label-owned CEC, which in turn will be serviced by Vodacom South Africa.

“Our vision is to be the biggest aggregator of wholesale capacity and customer to the infrastructure providers,” said Cell C chief Douglas Craigie Stevenson in an earnings release on Tuesday.

‘First step’

“We will collaborate on infrastructure but compete on products and services. The 4G roaming agreement with MTN is the first step in cost synergies and bringing tangible benefits to our customers,” he added.

Cell C’s earnings before interest, tax, depreciation and amortisation in the first half of the 2020 financial year was 12.3% lower year on year at R1.26-billion. The Ebitda performance was the result of a one-off restructuring and recapitalisation costs, said the company. However, cash Ebitda in the first half rose 450% year on year to R511-million. It also took a R5-billion asset impairment due to the new MTN network arrangement.

Overall revenue totalled R6.92-billion in the first half, down 7.7% year on year. Net debt, excluding leases, increased 13.7% year on year by end-June to R9.56-billion.

• This article is republished with the permission of REDD Intelligence, a US-based news and research provider focused on debt markets across emerging markets