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Fitch Affirms Telefonica Chile IDR at 'BBB+'; Outlook Stable
[September 04, 2007]

Fitch Affirms Telefonica Chile IDR at 'BBB+'; Outlook Stable


MONTERREY, Mexico --(Business Wire)-- Fitch Ratings affirms Compania de Telecomunicaciones de Chile S.A. (Telefonica Chile) ratings as follows:

--Local Currency Issuer Default Rating (IDR) at 'BBB+', Outlook Stable;

--Foreign Currency IDR at 'BBB+', Outlook Stable;

--National scale IDR at 'AA-(Chl)', Outlook Stable;

--National scale short-term IDR at 'F1+(Chl)';

--Local bonds series L and F at 'AA-(Chl)', Outlook Stable.

Telefonica Chile's ratings are supported by its leading position in the Chilean market, strong free cash flow generation and solid financial profile. The ratings reflect increased competition, moderate regulatory risk, weaknesses in local traffic and the policy of returning cash to shareholders via dividends or capital reductions, implemented during 2007. Telefonica Chile has manageable debt levels which solidly positions it in the rating category.



Telefonica Chile has been able to maintain relatively stable revenues as traditional voice services decline due to increased competition and substitution from fixed to mobile services. The strategy of introducing additional services such as broadband and more recently pay television services to compensate declines in traditional voice services has prove successful over the past few years. It is expected that these services, offered in bundle packages of double or triple play, should help maintain relatively stable cash flow generation and the Lines in Service (LIS) over the next few years as local traffic from fixed lines continue to decline. Fitch views, as competition increases, the offering of bundle services helps increase loyalty among existing customers and reduces churn.

Telefonica Chile's strategy to change its customers from regulated plans to flexible unregulated plans has resulted in lower exposure to regulatory risk related to tariff reviews. During 2006, approximately 38% of revenues came from regulated services, a decline from 50% in 2004, and should continue falling over the next few years as a proportion of total revenues. The new tariff decree for the 2009-2014 period is expected to have an initial proposal by November of 2008 and be effective by May 2009. The tariff decree includes regulated plans fixed and measured service charges, interconnection and access charges. Other pending issues that may be addressed in the short term includes the standard for digital TV and voice over internet protocol (VoIP), while it seems the unbundling of the network may not be addressed soon.


Telefonica Chile's strong brand equity, leading position and operational experience should allow it to maintain a strong free cash flow generation and a stable financial profile, with relatively stable debt levels, despite competitive challenges. EBITDA levels should remain relatively stable despite an expected decrease in EBITDA margins for 2007 close to 45% due to the launching of Internet protocol television (IPTV) services and the speed of growth in direct-to-home (DTH) services. For the last 12 months ended June 30, 2007, total debt-to-EBITDA was 1.4 times (x) and EBITDA-to-gross interest was 16.1x. The ratings incorporate expectation that total debt-to-EBITDA should remain stable at or below 2.0x.

Fitch expects that over the next few years, Telefonica Chile should generate free cash flow in the range of US$180 million to US$200 million. Telefonica Chile has strong liquidity position underpinned by strong free cash flow and a manageable debt maturity profile. Total debt is expected to remain relatively stable over the next few years, with upcoming maturities for the next few years most likely being refinanced. As of June 30, 2007 gross debt totaled US$754 million composed of a US$500 million syndicated loan, US$129 million in local bonds and US$125 million in other bank loans. The dividend policy to pay more than the current policy of 100% of net income if there is sufficient cash flow and Telefonica Chile's obligations are pay in full, should only take place if cash flow is available without altering its business strategy or financial risk profile.

Telefonica Chile is one of the largest telecommunications providers in Chile, with US$1.1 billion in revenues and US$533 million in EBITDA for the last 12 months ended June 30, 2007. Telefonica Chile is the largest local-service operator with 2.2 million lines in service, 574 thousand ADSL connections and 171 thousand television customers. Telefonica Chile is 44.9% owned by Spain's Telefonica S.A.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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