Moody’s Investors Service has downgraded fixed-line operator Telkom in line with SA's recent sovereign rating downgrade.

On Monday, Telkom said Moody’s had downgraded its rating to Ba1 from Baa3 with a negative outlook. The rating action follows Moody’s recent decision to downgrade the SA sovereign rating.

Telkom’s rating is linked to the sovereign rating due to the government’s 40.5% stake in Telkom and its operational concentration in SA.

Telkom said that as part of its rating decision, Moody’s indicated that the rating reflected the operator’s “overall strong credit metrics, which provide adequate headroom to the company's operating and competitive challenges”.

The company also had adequate levels of liquidity over the next 12-18 months with flexibility and sufficient levers to manage its cashflows, it said.

Petri Redelinghuys, founder of Herenya Capital Advisors, believes Telkom “wont require excessive amounts of borrowings and the impact of a downgrade should be minor”.

He noted that Telkom has increased borrowing in recent years to fund its aggressive mobile expansion together with a R1.5bn restructuring charge for the retrenchments that are currently under way, together with a possible provision for a tax dispute of about a R1bn.

With that in mind, “Telkom’s short-term fortunes don't look so rosy,” however, the company “does have a couple of aces up its sleeve”, he said.

Telkom's property portfolio has been valued at about R6.6bn which translates to R13 a share compared to a current share price of almost R19.

The operator could sell its tower business to decrease debt if it needs to, he said.

Trading on a two-year forward price to earnings ratio of less than four and on a fraction of its R57 a share book value, “Telkom can only be considered cheap at these levels and the debt downgrade should have very little impact on the valuation,” said Redelinghuys.

Shaun Murison, an analyst at IG Markets, said the downgrade of Telkom did not affect the share price movement of Telkom on Monday.

“The group does remain well capitalised and maintains sufficient headroom to raise further capital for expansion or acquisition if needed,” he said.  

Shares in Telkom were 5.14% higher at the end of trading on Monday at R19.03, giving it a R9.497bn market value.

On the same day, Moody's left competitor MTN’s rating unchanged and affirmed its Ba1 rating.

Africa's largest mobile operator said Moody’s also left the negative outlook unchanged to reflect the exposure to weakening sovereign credit quality in some of MTN’s key markets such as SA (Ba1 negative) and Nigeria (B2 negative).

Moody’s decision to affirm the rating is because it believes the company’s healthy credit metrics and good liquidity will help absorb the impact of the domestic macroeconomic environment’s deterioration, MTN said.

Murison said MTN is help by its dominant position in most of its markets. “Businesses with dominant market shares are often the more likely to weather an economic downturn, and possibly even grow market share with the superior liquidity and sized balance sheet,” he said.

S&P Global Ratings recently said MTN is at risk of having its debt downgraded in the next 12 months if the mobile network operator increases its relative exposure to Nigeria.

Nigeria is Africa’s biggest oil producer and a drop in prices will weigh on the West African economy. The country is MTN’s most profitable market, accounting for one-third of its annual profit. A drop in profitability there would likely have an impact on the group as a whole.