MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings affirms Telefonica Chile S.A.'s ratings as follows:
--Local currency Issuer Default Rating (IDR) at 'BBB+';
--Foreign currency IDR at 'BBB+';
--National scale IDR at 'AA(cl)';
--National scale short-term IDR at 'F1+(cl)';
--Local bonds series L, F, N and M at 'AA(cl)';
--Equity rating at level 4.
The Rating Outlook is Stable.
Telefonica Chile's rating actions are supported by its leading position in the Chilean fixed telecommunications market, solid financial profile and strong operating cash flow generation. The ratings reflect a strong competitive environment, low regulatory risk, weaknesses in local traffic and the policy of returning cash to shareholders. The company's strong brand equity, leading position and operational experience should allow it to maintain a strong cash flow generation and financial profile, with relatively stable debt levels, despite competitive challenges. In addition, the company's service offering benefits from integrated service offerings between Telefonica Chile and Telefonica Moviles Chiles S.A. (TMCH; rated 'BBB+').
The ratings take into account ownership by Telefonica S.A. (TEF) rated 'BBB+' by Fitch. Fitch views a majority ownership by TEF benefits Telefonica Chile in the form of operating efficiencies related to economies of scale, cost and administrative efficiencies between Telefonica Chile, TMCH and its parent in Spain. On Sept. 27, 2011, Fitch downgraded TEF to 'BBB+' from 'A-'. While the Rating Outlook for Telefonica S.A. is Stable, future downgrades of the parent Telefonica can pressure Telefonica Chile's ratings.
Competition to Pressure 2012 Margins:
Fitch expects to see a slight decrease in EBITDA during 2012 due in part to number portability. For the following years, growth in revenues from broadband and pay-tv should compensate for revenue losses in traditional voice services resulting in stable EBITDA levels and margins. Growth in revenues from broadband and pay TV services has compensated for revenue loss from traditional voice services during 2011 resulting in stable revenues and slightly better excluding non recurrent revenues from 2010. Steady revenues, excluding non recurrent revenue of 2011 due to the sale of towers and insurance reimbursement, together with cost efficiencies and expense savings have resulted in slightly better EBITDA margins.
Increased Capex Should Limit Free Cash Flow (FCF):
Higher capital expenditures in the range of CLP200 billion to CLP220 billion over the next few years and expected dividend payments of approximately CLP20 billion should limit free cash flow. Investments should be mainly focused on broadband and pay television services. Telefonica Chile's strategy is centered in increasing broadband accesses with bundle offerings that include voice and pay television services. This strategy contemplates increased investments to offer higher speeds and should mitigate declines in lines in service (LIS), control churn and increase loyalty within its customers.
Low Regulatory Risk.
Fitch believes the regulatory environment for Telefonica Chile has improved over the past few years. On January of 2009 the antitrust authority liberalized fixed and variable charges for local services and public telephony. In addition the tariff decree for the 2009-2014 period continues to regulate the interconnection and local access charges. The decree also set a wholesaler unbundling broadband service and number portability for fixed and mobile services.
Lower exposure to regulated revenues should balance against the introduction of number portability by next year. Telefonica Chile's regulated tariff services are approximately 13% of revenues, which favorably compares with 50% in 2004. Fitch believes that despite a lower mix of regulated revenues over total revenues, the company continues to face competitive challenges especially in traditional voice services. Fixed number portability is expected to be introduced during the first quarter of 2012 for fixed services in Santiago and then in the rest of the country during next year. Number portability should have a neutral effect in revenues but should pressure churn, costs and EBITDA. Telefonica Chile's strategy of bundling services should mitigate this effect as approximately 70% of residential LIS are under bundled offerings, however, Fitch anticipates the company to have a negative balance of number ports given Telefonica Chile's incumbent position.
Sound Financial Profile:
Management's new target of net debt to EBITDA to be at or below 1.0 times (x) is stronger than previously incorporated in the ratings and should balance with the expectation of limited FCF generation over the next few year, as the company invests in broadband and pay-TV growth. Fitch has previously incorporated into Telefonica Chile's ratings the expectation that over the long term total debt to EBITDA ratio should remain at or below 2.0x with positive FCF generation. The policy of uses of cash flow generation is first to maintain a conservative financial profile, then make necessary investments and then return the excess cash flow to shareholders.
Excluding non-recurrent items from the sale of towers and funds received from the insurance policies related to the earthquake from latest 12 months (LTM) figures, leverage metrics should be close to 1.1x by year end. For the 12 months ended Sept. 30, 2011, funds from operations (FFO) adjusted leverage was 1.0x and total debt to EBITDA was 1.0x. Coverage ratios of FFO interest coverage and EBITDA to gross interest were 31.6x and 32.6x, benefitting from low interest rates.
As of Sept. 30, 2011, total debt after hedges amounted to CLP296 billion and the debt maturity profile is manageable. Indebtedness is primarily composed of CLP108 billion in a syndicated loan, CLP206 billion in local bonds, CLP4 billion in capital leases and a gain of CLP22 billion in hedges of principal. All the debt is denominated in local currency after hedges and 25% has a floating interest rate. Fitch expects that as interest rates increase, the company should continue to increase the proportion of debt with fixed rates by using hedges.
Additional information is available 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Global Telecoms Companies', Sept. 16, 2010;
--'Corporate Rating Methodology', Aug. 12, 2011;
--'National Ratings Criteria', Jan. 19, 2011;
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', Aug. 12, 2011;
--'Short-Term Ratings Criteria for Non-Financial Corporates', Aug. 12, 2011.
Applicable Criteria and Related Research:
Rating Global Telecoms Companies - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
Short-Term Ratings Criteria for Non-Financial Corporate
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647249
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