MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for Telefonica Moviles Chile S.A. (TMCH):
--Local currency Issuer Default Rating (IDR) at 'BBB+';
--Foreign currency IDR at 'BBB+';
--US$300 million senior notes due 2015 at 'BBB+';
--National scale at 'AA(cl)';
--Series A and B local bond issuances due 2014 registered under line #589 at 'AA(cl)';
--Series C and D local bond issuances due 2016 registered under line #590 at 'AA(cl)'.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
TMCH's ratings reflect its strong market position, mobile services portfolio, moderate regulatory risk and financial flexibility. TMCH's solid financial profile incorporates the expectation of stable net leverage and strong funds from operations (FFO) generation. Parent Telefonica S.A. (TEF) also owns Telefonica Chile which offers complementary fixed telecommunication services and supports TMCH competitive position. The relationship between both fixed and mobile companies allows TMCH to achieve synergies in costs and investments, manage a single brand and unification of points of sale, among other things.
The ratings take into account ownership TEF, rated 'BBB+' with a Negative Rating Outlook by Fitch. In the event that Fitch downgrades TEF by one notch, Fitch believes that TMCH ratings can remain at 'BBB+' provided the company keeps its financial policies unchanged and TEF liquidity position remains manageable. However, multiple notch downgrades of TEF are likely to drag TMCH ratings.
Mobile Internet and Data Supporting Revenues:
Fitch believes value-added services (VAS) and mobile Internet and data services should help mitigate a future slowdown in revenue growth from traditional voice services, given the level of mobile penetration in the country and expectation of access charges declines in 2014. Widespread adoption of Internet and data services through smartphones offers potential revenue growth that should be sufficient to offset traditional voice and interconnection revenue declines in the future as (approximately 15% of mobile users have these services). Revenues from Internet and data (excluding text messaging) now account for approximately 12% of service revenue. According to Subtel, as of Dec. 31, 2012 mobile penetration reached 138.9% or 24.1 million users.
Strong Competitive Environment:
Competition is strong. The introduction of number portability since December 2011 and the entrance of new operators including MVNOs have intensified competition. According to Subtel, number portability has resulted in net ports of 167,398 of TMCH to other providers as of June 30, 2013, of which most of them are post-paid users. Fitch expects TMCH to change its commercial strategy during 2013 in order to try to regain post-paid users. Conversely, TMCH has lead the Chilean Industry in prepaid net adds for the last 12 months ended March 31, 2013.
Handset Accounting Change Neutral to Cash Flow:
Leverage ratios based on EBITDA should increase due to the change in the accounting treatment of postpaid handsets, however, they are expected to remain solid and free cash flow (FCF) should not change. In October 2012, the accounting for postpaid handsets changed and since then they are expensed in the income statement rather than being capitalized. On a pro forma basis, this change in accounting treatments will result in a decline in EBITDA of approximately CLP100 billion out of the CLP348 billion reported in 2012. This amount should be compensated by an inflow for the same amount in several accounts of the cash flow statement including working capital and other assets and liabilities, maintaining FCF unchanged.
Lower Interconnection Rates Manageable:
Fitch expects a significant reduction in mobile termination rates during the tariff setting process this year, which will become effective in January 2014. However, the net effect to EBITDA should not be material as a decline in interconnection costs will offset most of the decline in interconnection revenues. In addition, the mobile interconnection rates decline should reduce revenues but should improve EBITDA margins next year as EBITDA should not materially change due to this. Mobile data revenues growth should compensate for revenue declines related to reductions in mobile interconnection rates.
Strong Financial Profile and Extended Maturity Profile:
While gross leverage is expected to increase due to the accounting for handsets, Fitch expects TMCH's net debt to EBITDA to be close to 1.0 time(x)-1.3x in the next few years. Increased FFO and relatively stable capital expenditures should result in solid pre dividend FCF over the next few years. This in turn should strengthen TMCH's ability to meet its financial obligations. For the 12 months ended March 31, 2013, leverage measured as total debt to EBITDA stood at 1.2x and net debt to EBITDA at 0.6x. TMCH's maturity profile is manageable. Next maturities are CLP58 billion in 2014 and CLP146.9 billion in 2015. Fitch expects that TMCH will refinance in advance these maturities.
RATING SENSITIVITIES:
Future multiple notch downgrades of parent TEF ratings by Fitch are likely to drag Telefonica Moviles Chile's ratings. In the event that Fitch downgrades TEF by one notch, Fitch believes that Telefonica Moviles Chile ratings can be maintained at 'BBB+' if the company keeps its financial policies unchanged as long as TEF liquidity position remains manageable. Other factors that can affect TMCH's credit quality are poor operating performance due to competition, convergence of services or regulation that results in a sustained increase in leverage. Positive factors to credit quality include an increase in FCF and broader service revenue diversification while maintaining a strong financial profile however, a positive rating action is limited given the company's business and financial profile and parent company ratings.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Telecom Companies' (Aug. 9, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)' (Aug. 10, 2012).
Applicable Criteria and Related Research:
Rating Telecom Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
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=685552
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=795513
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