RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed Telefonica del Peru S.A.A.'s (TDP) ratings as follows:
--Local currency Issuer Default Rating (IDR) at 'BBB+';
--Foreign currency IDR at 'BBB+';
--PEN754 million senior notes due 2016 at 'BBB+'.
The Rating Outlook for the corporate ratings remains Stable.
KEY RATING DRIVERS:
TDP's ratings are supported by its strong consolidated financial profile, underpinned by its low leverage, healthy cash flow generation and manageable debt maturity. TDP and its subsidiaries present a solid business position as the largest Peruvian telecommunications group and a diversified revenue stream with integrated operations from their various business segments. TDP is controlled by Telefonica SA (Telefonica) in Spain (Fitch IDR 'BBB+', Outlook Negative), with relevant presence in Latin America. As limiting factors, the ratings incorporate moderate regulatory and political risks and heightened competition.
Financial Profile Should Remain Strong:
TDP's consolidated credit protection measures are expected to remain strong, even in a stress scenario. The company continues to follow Telefonica group's strategy to reduce leverage. For the last 12 months (LTM) ended March 31, 2013, TDP's consolidated leverage measured by total adjusted debt-to-EBITDAR of 0.9x and net adjusted debt-to-EBITDAR of 0.7x compare favorably with the respective 1.3x and 1.0x achieved in 2011. On a stress scenario basis, considering PEN1 billion of additional debt, these ratios would be, on a pro forma basis, 1.2x and 1.0x, respectively, still at conservative levels. Fitch incorporates in TDP's ratings a net leverage not higher than 2.0x.
High Operational Cash Flow Generation, Margin Recovered:
On a consolidated basis, TDP has been able to compensate for the decline in traditional local fixed telephony and long distance revenues, mainly through the growth in the mobile, broadband and pay-TV businesses. For the LTM ended March 31, 2013, net revenues of PEN8.3 billion were 6.5% higher than in 2011. For this same period, EBITDAR of PEN3.2 billion resumed its growth when compared to the amount of PEN3 billion reported in 2011, as EBITDAR margin of 39.1% was above the 38% in 2011. TDP's consolidated EBITDAR margin recovered even in a competitive environment and increased penetration in lower-income classes and compares favorably with its peers in Latin America.
TDP's consolidated cash flow generation is strong and has benefited by reduced dividend payments in the last two years. For the LTM ended March 31, 2013, cash flow from operations (CFFO) of PEN2.3 billion was sufficient to cover capex of PEN1.5 billion and insignificant dividends, resulting in a free cash flow (FCF) of PEN832 million. TDP reduced dividend payments in order to use the cash saved to pay debt and improve credit metrics. Fitch expects positive FCF during 2013 based on the continuity of low cash returns to the parent company Telefonica. However the agency expects TDP to resume the dividends payment over the next years. Flexibility to reduce dividends in case of necessity is viewed as positive.
Leading Business Position:
Fitch expects TDP and its subsidiary Telefonica Moviles S.A. (Moviles) to keep their respective leading market positions in the fixed line and mobile business. At the end of September 2013, TDP's market share in voice was 83.9%, with 89.1% in fixed-broadband, and 71.5% in pay-TV, while Moviles had a 60.2% share in the mobile segment. The group benefits from economies of scale, extensive network coverage, network synergies between mobile and fixed operations, and established brand name. The strategy of growing its broadband and pay-TV businesses, which still offers good growth prospects, as well as the mobile business, should help diversify its revenue away from local regulated services which are mature and partially offset revenue declines in more mature segments. Concerns relate to heightened competition in the Peruvian telecom market.
Lower Debt with Manageable Maturity Schedule:
On a consolidated basis, TDP presents a sound financial profile, with manageable debt maturities and minimal exposure to foreign currency. As of March 31, 2013, the group's consolidated adjusted debt was moderately reduced by 22% to PEN2.9 billion from PEN3.8 billion presented at the end of 2011. The group had already lowered its debt by 10% during 2011. TDP liquidity position of PEN604 million was robust and covered short-term debt of PEN476 million by 1.3x. The ratio of CFFO+cash & equivalents/short-term debt was also high at 6.1x on Dec. 31, 2012.
Regulatory and Political Risks Are Moderate:
Fitch incorporates moderate regulatory and political risks into the ratings. The main issue related to the renewal of three of Moviles' concessions to operate in the mobile segment that expired in 2011 and 2012 was solved. Fitch does not foresee any material impact on the group's credit strength due to the news conditions of the renewed concessions. The mobile business represented 37% of TDP's consolidated revenues and around 56% of EBITDA in 2012, being an important driver for growth to the group and potentially strategic in the offering of bundled services to customers. During 2013 the productivity factor for the 2013-2016 period, which starts in September, should be set. Fitch does not anticipate a material impact to credit quality as a result of this.
RATING SENSITIVITIES:
A weakening in TDP's consolidated operational performance or financial profile or further downgrades for Telefonica SA can negatively pressure its ratings. Fitch will also continue to monitor the company's pending process with the Peruvian Superintendencia Nacional de Administracion Tributaria (SUNAT) related to income taxes referred to 2000 and 2001. In case a significant contingent liability materializes, Fitch will analyze its impact on the ratings. An upgrade for TDP's LC IDR is limited due to Telefonica's current IDR of 'BBB+' with a Negative Outlook.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791034
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