MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for Empresa de Telecomunicaciones de Bogota S.A., E.S.P.(ETB) as follows:
-Local currency Issuer Default Rating (IDR) at 'BBB-';
-Foreign currency IDR at 'BBB-';
-National scale rating at 'AAA(col)'.
The Rating Outlook is Stable.
ETB's ratings are supported by the company's solid financial profile, free cash flow generation, and leading positions in local and broadband services in Bogota. Conversely, the ratings are tempered by increased competition, mobile substitution, and limited geographical footprint and service revenue diversification. The ratings incorporate that ETB's financial profile and capital structure should not materially change if the District of Bogota, the controlling shareholder, approves the decision to sell its control of the company.
ETB's 'BBB-' FC IDR, rated at Colombia's country ceiling, incorporates a stronger credit profile than the FC IDR of the District of Bogota, rated 'BB+' by Fitch, and recognizes that the linkage between parent and subsidiary is weak and non-dependent. Despite being owned by the District, ETB has an independent management and historically has maintained a conservative financial profile. ETB's dividend payment is not material to the District finances. In addition, the District has in place until 2013 a voluntary statement to ensure that good corporate governance is enforced. Fitch expects the relationship between the District and ETB will not affect ETB's business risk and financial profile.
Weak operational performance balanced with solid financial profile:
Considering unfunded pension liabilities, contingencies balance and guarantees to Colombia Movil, the company's financial profile is strong when compared to its regional peers. Free cash flow generation, good liquidity and a manageable debt maturity profile further underpin credit quality. Revenues are expected to decline in the medium term as local and long distance service revenues are not expected to be fully compensated by growth in data, and Internet should only partially compensate these declines. However, cash from operations should give the company flexibility to maintain a stable capital structure in the event of weak operating results.
Local service supporting free cash flow but competition intensifying:
ETB's credit quality is underpinned by the strong cash flow generation as a result of its incumbent position in Bogota's local service; however, this segment has been under pressure due to increased competition. FCF gives financial flexibility to maintain a stable credit profile, even with weak operating trends. The company has an estimated 74% of the lines in service in Bogota, an extensive network coverage which allows it to offer multiple service offerings to Bogota-based corporations with nationwide operations. During the past two years competition in Bogota has been intensified by Telmex, as it has gained market share at the expense of ETB. ETB has introduced bundled offerings to gain loyalty from existing customers in the residential segment, including an agreement with DirectTV, in order to mitigate competitive pressures. Additionally the company's strategy is also focused on growing data, broadband and networking services.
ETB's financial profile is solid and expected to remain stable over the medium term, with historically low leverage. For the 12 months ended Dec. 31, 2010, funds from operations (FFO)-adjusted leverage and total debt to EBITDA ratios were at 0.5 times (x) each. Adjusting debt for contingencies, leases for satellites and frequencies, unfunded pension liabilities and guarantees given to Colombia Movil and adding back provisions to EBITDA results in a ratio of total adjusted debt to adjusted EBITDA of 1.2x, which is below the 1.4x average of the past three previous years.
ETB's liquidity is strong, underpinned by high cash balances, comfortable debt maturity profile and free cash flow generation. As of Dec. 31, 2010 cash balances amounted to COP189.2 billion, compared to the next three years' maturities of COP214.5 billion. ETB's total on balance sheet debt of COP302.7 billion at year-end 2010 was comprised mostly of debt with local banks. All debt is denominated in local currency and pays a variable interest rate.
Key Rating Drivers:
A negative rating action can be considered if Fitch perceives the company will generate, over the medium term, negative free cash flow due to a combination of increase capex/dividends and weak trends in cash from operations that is funded with additional indebtedness, resulting in a sustained increase in adjusted (for contingencies, pension liabilities and leases) leverage. Positive factors for credit quality include better geographical and service diversification, larger scale or ownership by a better-rated telecom entity with willingness to support ETB.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Global Telecoms Companies', Sept. 16, 2010;
--'Corporate Rating Methodology', Aug. 16, 2010;
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', Jul. 14, 2010;
--'National Ratings Criteria, Jan. 19, 2011.
Applicable Criteria and Related Research:
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Parent and Subsidiary Rating Linkage Criteria Report
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Rating Global Telecoms Companies - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205
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