MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed Telefonica Chile S.A.'s ratings as follows:
-Local Currency Issuer Default Rating (IDR) at 'BBB+';
-Foreign
Currency IDR at 'BBB+';
-National scale long-term rating at
'AA(cl)';
-National scale short-term rating at 'N1+(cl)';
-USD500
million senior notes due 2022 at 'BBB+';
-Local bonds series F, M
and N at 'AA(cl)';
-Equity rating at level 4.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Telefonica Chile's ratings reflect its leading
position in the Chilean fixed-line telecommunications market, sound
financial profile and solid cash flow generation. The ratings take into
account a strong competitive environment, low regulatory risk,
weaknesses in local traffic and the policy of returning cash to
shareholders. The company's strong cash flow generation and financial
profile are the result of strong brand equity, leading position, and
operational experience, despite competitive challenges.
The ratings take into account ownership by Telefonica S.A. (TEF), rated 'BBB+' with a Negative Outlook by Fitch. In the event that Fitch were to downgrade TEF by one notch, the agency believes that Telefonica Chile's ratings can remain at 'BBB+' provided Telfonica Chile keeps its financial policies unchanged and TEF's liquidity position remains manageable. However, multiple-notch downgrades of TEF are likely to drag Telefonica Chile's ratings down. Parent TEF also owns Telefonica Moviles Chile S.A., rated 'BBB+', with a Stable Outlook, which offers complementary mobile telecommunication services and supports Telefonica Chile's competitive position. The relationship between both fixed and mobile companies allows Telefonica Chile to achieve synergies in costs and investments, manage a single brand, and unify points of sale, among other things.
For the next few years, growth in revenues from broadband and pay-tv should compensate for revenue losses in traditional voice services. This should result in relatively stable EBITDA levels and margins. The number of fixed voice customers is expected to stabilize, underpinned by growth in bundle offerings. Steady revenues, cost efficiencies and expense savings can result in slight improvements to EBITDA margins.
Fitch believes the regulatory risk for Telefonica Chile is low. In addition, Telefonica Chile's regulated tariff services revenues are currently not material, which compares favorably with 50% in 2004. Number portability has not been material for Telefonica Chile since its introduction in December of 2011. Of the total decline in net lines in service (LIS) since December 2011, approximately 40% is explained by number portability and the rest by other factors.
In Fitch's opinion the company continues to face competitive challenges, especially in traditional voice services. However, the strategy of bundling services should mitigate this effect as approximately 60% of residential LIS are under bundled offerings. Revenues of fixed telecommunications declined 10% in the first half of 2013 versus 2012; however, revenues from Broadband and Pay-TV were not able to fully compensate for the revenue decline of fixed telecommunications revenues. This decline is mainly explained by lower revenues from long distance and flexible plans.
Higher Capex Limits FCF:
High capital expenditures should limit
free cash flow (FCF). Investments should average around CLP200 billion
for the next few years, and be mainly focused on Broadband and Pay-TV as
well as network upgrades. Telefonica Chile's strategy is focused on
increasing broadband access with bundled offerings that include pay
television and voice services. This strategy includes increasing
investments to offer higher broadband speeds via fiber and Pay-TV
services through DTH or IPTV to mitigate declines in LIS, control churn,
and increase loyalty among its customers.
Sound Financial Profile:
Incorporated into Telefonica Chile's
ratings is Fitch's expectation that over the long term, total
debt-to-EBITDA will remain at or below 2x with positive FCF generation.
Company policy for use 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. As of June 30, 2013,
total indebtedness after hedges amounted to CLP466 billion, consisting
52% of international bonds, 20% in syndicated loans, and 28% in local
bonds. All the debt is denominated in local currency after hedges and
62% has a floating interest rate.
During the last quarter of 2012, Telefonica Chile issued USD500 million in senior notes due 2022 to refinance in advance 2013 and 2014 maturities. This should temporarily increase gross leverage, while keeping net leverage close to historical levels. For the 12 months ended June 30, 2013, leverage measured by total debt-to-cash from operations (CFO) was 1.7x and total debt-to-EBITDA was 1.8x. For this same period, net debt-to-EBITDA was 1.2x. Ratios of CFO interest coverage and EBITDA to gross interest were 10.7x and 9.2x, respectively.
RATING SENSITIVITIES:
Factors that can drive a negative action to the rating or Outlook include multiple-notch downgrades of parent company Telefonica S.A. ('BBB+', Outlook Negative) or a rapid deterioration in the company's operating performance due to competition, convergence of services, or regulation that results in a sustained increase in leverage over 2.0x. Factors that could drive a positive action are an improvement in credit quality, including reducing and maintaining long-term leverage of total debt-to-EBITDA of 1.0x or below, an increase in FCF, and broader service revenue diversification.
Additional information is available www.fitchratings.com.
Applicable Criteria and Related Research:
--'Rating Telecoms
Companies', Aug. 9, 2012;
--'Corporate Rating Methodology'(Aug. 05,
2013);
--'National Ratings Criteria', Jan. 19, 2011
--'Parent
and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities
Within a Corporate Group Structure)', Aug. 05, 2013;
--'Short-Term
Ratings Criteria for Non-Financial Corporates, Aug. 5, 2013.
Applicable Criteria and Related Research:
Short-Term Ratings
Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415
Parent
and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within
a Corporate Group Structure
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476
National
Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
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=801767
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