MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the local and foreign currency issuer default ratings (IDRs) of Telemovil El Salvador, S.A. (Telemovil) and Telemovil Finance Co. Ltd (TF), including the $450 million senior notes due 2017 issued by TF and guaranteed by Telemovil at 'BB'. The Rating Outlook is Stable.
Telemovil's ratings reflect diversified service offering and platforms, leading positions in mobile and pay television services in El Salvador, strong brand recognition, extensive network coverage, sound financial profile and positive pre-dividend free cash flow. Credit quality is tempered by intense competition, limited geographic diversification and the dependence of the economy on remittances, which affects demand for telecommunications services. The ratings factor in the relationship with parent company Millicom International Cellular (Millicom), which fully owns and runs Telemovil and benefit from synergies related to the larger scale of the parent, expertise in management but also considers the payment of dividends, loans to affiliates and Millicom's financial position. For the 12 months ended June 30, 2011 Millicom reported approximately US$4.2 billion in revenues, US$1.8 billion in EBITDA, funds flow from operations of US$1.3 billion, on balance sheet indebtedness of US$2.3 billion and cash balances of US$1.0 billion.
Telemovil's mobile operations have performed below expectations; however operating trends seem to be stabilizing. A tough competitive environment has pressured mobile ARPUs during the past twelve months. Despite the competitive issues, Telemovil has retain is leading market share at approximately 44% of total users. Fitch views the transaction between America Movil and Digicel, where as part of the transaction America Movil will receive Digicel's operation in El Salvador, should result in a more balanced competitive environment in the mobile segment, as three players will remain. Once the transaction is closed America Movil's Claro will increase its market share to approximately 38% and Telefonica will remain close to 18%.
In Fitch's view, Telemovil's strategy of offering bundled services along with its strategy of focusing on offering differentiated mobile services should allow the company to maintain its leading market position in the medium term. The acquisitions of Millicom Cable (formerly AMNET) and Navega took more time that originally anticipated due to delays from local authorities. Millicom Cable started being consolidated into Telemovil's financial statements since May of 2011, while Navega is expected to clear authorizations and start consolidating into Telemovil by the fourth quarter of 2011. Despite this delay, the strategy and operations of these two companies are managed by Telemovil resulting in the offering of multiples services to customers. The consolidation of these companies does not affect the integration of operations and service offering to customers as they are already bundling services. Mobile operations should remain as the biggest cash flow generator.
Fitch believes the competitive position of Telemovil will improve due to the offering of bundles with multiple services and expense synergies. However, currently the customers with quadruple play bundles are very limited. Millicom Cable is the leading CATV provider in El Salvador with approximately 316.6 thousand revenue generating units (RGUs) as of June 30, 2011. Millicom Cable network has close to 80% of bidirectional capability and covers approximately 600,000 homes passed. Navega provides communications services to enterprises and carriers that require broad range of services that demand higher bandwidth.
Considering Millicom Cable and Navega and despite posting weaker results in the mobile segment, Telemovil has a sound financial profile. On a proforma basis, total debt to EBITDA and net debt to EBITDA should be close to 2.3 times(x) and 1.5x, respectively. Assuming the loan to the Colombian operation (described below) is collected and expected dividend payments during the year, proforma net debt to EBITDA should approximate to 1.0x. Going forward, Fitch expects that mobile operations should continue stabilizing resulting in stable credit metrics. Excess cash flow from operations after capital expenditures is expected to be used for dividend payments.
Telemovil has a strong liquidity position. As of June 30, 2011 total debt was composed of the US$450 million senior notes due 2017 issued by TF and had cash balances of US$155 million of which approximately US$55 million should be used for a dividend payment during the present year. In addition in 2006, the company lent funds to a related party that owns 50% plus one share of Colombia Movil. The amount outstanding of this loan is US$155 million as of the end to the second quarter of 2011 and is due in October of 2011. It is not clear if this loan will be refinanced to a maturity that is closer to the maturity of the 2017 senior notes; but in the event that Telemovil receives the payment approximately US$120 million should remain in cash at Telemovil due to the indenture of the senior notes, further supporting liquidity.
Key Rating Drivers:
A negative rating action can be triggered if total debt to EBITDA reaches 2.5x, absent of improved liquidity, and remains at this level over time due to different factors such as tougher competition that leads to a continued deterioration of cash flow generation. Other negative factors to credit quality include material declines in mobile market share, and a deteriorating financial profile on the parent (MICC) that would lead to distribute higher dividends or increase Telemovil's leverage. Conversely, positive factors to credit quality include Telemovil making firm progress in reducing and maintaining a leverage level of total debt to EBITDA in the range 1.0x -- 1.5x and/or increased geographical and/or service diversification.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Operating Leases: Updated Implications for Lessees' Credit, (Aug. 5, 2011);
--'Rating Global Telecoms Companies' (Sept. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Operating Leases: Updated Implications for Lessees' Credit
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462222
Rating Global Telecoms Companies - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205
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