CFO on Naspers’s debt downgrade to “junk” status

Market watchers and commentators reacted with surprise and confusion to the downgrading of Naspers' senior unsecured debt to 'junk status' which is identified as non investment grade by Fitch. The general consensus is that the ratings agency is far off the mark with many finding the move unfounded, given the success and position of Naspers. Fitch's contested downgrade was closely followed by Tencent's impressive quarterly results, reporting a 59% increase in year on year revenue – Naspers owns a sizeable chunk in Tencent and is currently on the brink of aggressively entering the e-commerce business. Alec Hogg spoke to Nasper's CFO, Basil Sgourdos about the bemusing downgrade and Naspers' strategy going forward. This is a hot stock no matter how you cut it. – LF

ALEC HOGG: Well, the credit agency Fitch has cut its rating on South Africa's Naspers – the senior unsecured debt – to non-investment grade or junk status. It cites a deterioration in the profitability of the company due to heavy investment in development. Joining us on the line from China is the Naspers Chief Financial Officer, Basil Sgourdos. Basil, we are scratching our heads here. As far as you're concerned, is this a disturbing development that you see – that Fitch has downgraded your debt?

BASIL SGOURDOS: Yes, thanks for the time and the opportunity to talk to you. At the end of the day, we did communicate when we announced our full-year results that we would continue with our strategy of investing in e-commerce and in DPT, such that we build long-term revenue and earnings growth. Our strategy is proceeding along those lines and we're very comfortable with where we're at. Of course, what that does in the near term is it does supress our earnings and our cash flows. When they take those numbers and put them into the key networks that they compute, we actually come out lower than other BBB- rated companies do. That said, our main concern, and what perplexes us with Fitch's approach is that they ignore the fact that we have in excess of $50bn in marketable securities on our balance sheet and that our nett debt, excluding our transponders, is just R1.5bn.

That's more than 33 times our nett deposition. As such, we don't fully agree with the approach taken. Our balance sheet remains very sound. We have very low gearing at 23 percent. We are well within our financial covenant in terms of our revolving credit facility. Fitch's focus on purely the credit metrics and not looking at our balance sheet and the strength of it is a concern to us.

ALEC HOGG: Well, there's no doubt that the investors – in equities, at least – are completing ignoring what Fitch had to say. The share price of Naspers up by two-and-a-third percent today, although that might also be related to the numbers coming out of Tencent. Now, you're in China. Are you engaging with your partners over there? They're really shot the lights out in the last quarter.

BASIL SGOURDOS: Yes, we have a very good relationship with Tencent. As you know, Koos Bekker and Charles Searle are on the Tencent board. We're very happy with the progress that Tencent has made, particularly around the area of mobiles, which is going to be key to the future growth in China. I think they have a fantastic team, great leadership, and are executing phenomenally well.

ALEC HOGG: Fifty-nine percent growth year-on-year in these quarterly numbers. Basil, just to go back to your debt: the fact that you have now been dropped to junk status – is that going to affect your lending approach into the future?

BASIL SGOURDOS: That's a good question. In fact, we have sufficient firepower on our balance sheet (and capacity) to execute on our plans. We obviously forecast in great detail over a three to five-year cycle, and we have sufficient firepower to do what we need to do. We don't plan to go to the market to raise debt or equity. There's nothing that requires that right now. Our first refinancing only comes up by 2017 and we hope that through that process, as we build out our DPT business and our e-commerce business, our longer-term revenue cash flow and earnings profile will improve. As such, in the near term, there's no impact either on our interest payments, or on our cash flows.

ALEC HOGG: So this announcement is more irritation value than affecting the company, in essence.

BASIL SGOURDOS: Yes. As we say, our strategy remains sound. Our balance sheet is very strong. We have more than sufficient assets on our balance sheet. We have very low debt. As I said, nett debt, excluding our transponders, is only $1.5bn. Our gearing is only 23 percent. We have in excess of $55n worth of marketable securities on the balance sheet. There really is no issue here, either from an equity investor or a debt/lender perspective, so we will continue to move forward and build on our strategy. Our focus is on building long-term revenue and earnings growth through our investments in e-commerce and DPT.

ALEC HOGG: That was Naspers; Chief Financial Officer, Basil Sgourdos talking to us from China where the big news today is Naspers' largest investment is in Tencent. The investment in Tencent is worth almost the entire Naspers market cap. Well, Tencent achieved a 59 percent growth in revenues year-on-year for the most recent quarter. That exponential growth continues and as Basil was saying – and we pretty much called it in our discussion with our market watcher – that the downgrade by Fitch is bemusing, to say the least.