MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed Colombia Telecomunicaciones S.A. E.S.P.'s (Coltel) foreign and local currency Issuer Default Ratings (IDRs) at 'BB' and the USD750 million senior notes due in 2022 at 'BB'. The Rating Outlook is Stable.
KEY RATING DRIVERS
Coltel's ratings incorporate the improvement in competitive position from the merger of the fixed and mobile operations which has resulted in a company with national coverage and a diversified service portfolio. The ratings also reflect new conditions after the restructuring of the payment obligations with the 'Patrimonio Autonomo de Activos y Pasivos de Telecom (Parapat)', which resulted in a reduction in the liability and flexibility of future payments when compared with previous conditions. The ratings are tempered by existing obligations with the Parapat, which increase adjusted leverage and pressure cash flow generation; higher capital expenditures over the next few years should limit free cash flow (FCF).
COMPETITIVE POSITION STRENGTHENED
In Fitch's view, Coltel's competitive position has strengthened from the integration of fixed and mobile operations. The combined company has nationwide coverage, along with increased operational scale and revenue diversification. Likewise, its operation benefits from the opportunity to capture synergies from operating expenses, as well as infrastructure sharing, IT systems integration, and use of fixed network transmission capacity to support higher demand for mobile services, among others. Fitch views the company's strategy as positive and is intended to increase mobile broadband and value-added services (VAS), along with Pay-TV services and fixed-line broadband access, to help support blended ARPU and mitigate the slowdown in revenues from traditional voice services.
MODERATE LEVERAGE
For the next five years, Fitch expects the company's total on-balance-sheet debt-to-EBITDA to be somewhat stable in the range of 2.5x to 3.0x. For the 12 months ended June 2013, total debt-to-EBITDA was 2.7x. The merging of Coltel with the mobile operations resulted in lower leverage due to the increase of EBITDA generation along with the reduction of the liability under the Parapat. The mobile business contributes 57% of total revenues and about 60% of EBITDA.
Fitch views liability with the Parapat under the new restructuring conditions as softer debt in terms of leverage, but not in terms of debt service and cash flow. Parapat is a long-term obligation ending in 2028 that reduces available cash flow, as it represents a significant expenditure, by approximately 7% of revenues in 2014 and 10% from 2015 thereafter. The obligation with the Parapat increases adjusted leverage but provides flexibility for payments and could more easily be refinanced under a stress scenario. By adjusting debt by the present value of this commitment and of the rents for infrastructure, for the 12 months ended June 2013, total adjusted debt to EBITDAR and funds from operations (FFO), leverage was 5.1x and 5.5x, respectively.
HIGHER CAPEX LIMITS FCF
Fitch anticipates the FCF generation will be negative during the next three to four years due to Coltel's demanding capex plan. The company expects to spend USD2 billion in capex in the next four years which will be funded from cash generated from operations and marginal debt requirements, with no dividend payments expected. Coltel's capital expenditures program should be used primarily for mobile technologies, fixed broadband, additional spectrum, and mobile license renewal. Fitch expects this investment to be funded mainly from internally generated resources with marginal debt requirements; cash flow from operations (CFO)-to-capex should be close to 1x for the next five years. Expected FCF generation should be negative for the next three to four years.
MODERATE IMPROVED LIQUIDITY
The company has improved its tight liquidity position. The issuance of the senior notes and debt re-negotiations with local banks have eased pressure on cash flow and improved its maturity profile. Coltel extended average debt life to six years and expects over the next few years to roll over its maturities, to release short-term cash flow for capital expenditures. The company has uncommitted credit lines with local banks which support its liquidity position and mitigate a possible exposure to refinancing risks. As of June 30 2013, cash totaled USD109 million, which is expected to be used for the new spectrum license and short-term maturities are expected to be paid from internal cash generation.
RATING SENSITIVITIES
Factors to credit quality that could lead to a positive rating action include total adjusted leverage-to-EBITDAR declining towards 3.0x in conjunction with increased FCF and FCF margins while maintaining its competitive position.
Factors that could trigger a negative rating action include the expectation that total on-balance-sheet debt-to-EBITDA increases and remains at or above 3.0x over time, due to, among other factors, weak operating results and higher than expected capital expenditures.
Additional information is available 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Rating Telecom Companies', Aug. 09, 2012;
--'Corporate Rating Methodology', Aug. 05, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Rating Telecom Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=801238
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