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Fitch Rates UNE EPM Telecomunicaciones' IDR 'BBB'; Outlook Stable
[October 20, 2016]

Fitch Rates UNE EPM Telecomunicaciones' IDR 'BBB'; Outlook Stable


Fitch Ratings has assigned UNE EPM Telecomunicaciones S.A. (TIGO UNE) Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) of 'BBB'. The Rating Outlook on the IDRs is Stable. Fitch currently rates the company's National Long-Term Rating 'AAA(col)'/Stable Outlook.

TIGO UNE's ratings reflect the company's fully-integrated operations and solid network competitiveness, which support its strong market position as the second largest service provider in terms of revenue in the competitive Colombian telecom sector. The company's cash flow from operations is well diversified into both fixed and mobile services, and its financial profile is solid for the rating category. TIGO UNE's ongoing investments for network upgrades/expansion should support its continued subscriber growth and help maintain stable credit profile in the short to medium term as reflected by the Stable Outlook.

TIGO UNE's ratings also reflect a linkage between the company and its controlling shareholder, Millicom (News - Alert) International Cellular S.A. (MIC, rated 'BB+'/Stable Outlook), which holds the majority of shares with voting rights in the company. The remaining stake is held by Empresas Publicas de Medellin E.S.P. (rated 'BBB+'/Negative Outlook). TIGO UNE is MIC's largest operating subsidiary among the MIC group of companies, highlighting its financial importance to the parent's credit profile. MIC's reliance on dividend income from its subsidiaries could potentially pressure TIGO UNE's cash flow generation and leverage.

KEY RATING DRIVERS

Strong Market Position:

TIGO UNE is the second largest telecom operator in Colombia, in terms of the revenue market share. The company has a diversified service portfolio with a nation-wide operational footprint with high quality and strongly competitive HFC networks for the fixed business and 3G/4G mobile networks.

TIGO UNE held the second and third subscriber market shares in fixed internet and mobile voice with market shares of 24.5% and 19.6%, respectively, as of June 2016, according to the Ministerio de Tecnologias de la Informacion y las Comunicaciones (MinTic). During the six month period ending June 30, 2016, the company posted a 61% increase in its 4G LTE (News - Alert) subscriber base, reaching 484,117 users. Also, the company held the second TV market share position as of June 2016 at 20.6%.

Stable Performance:

TIGO UNE's solid performance has continued following its integration with Colombia Movil in 2014, and Fitch expects the trend to remain stable in the short to medium term despite competitive pressures in the mobile segment. The company's revenues reached COP2.6 trillion during the first half of 2016, which was the second largest in the industry behind American Movil's Claro (News - Alert) with COP5.4 trillion revenues. During the same period, operational service revenues, excluding handset sales, grew by 1.4% and its EBITDA margin also improved to 28.9%, which compares favourably to 27.9% during the same period in 2015, mainly due to operational efficiencies achieved through the aforementioned integration.

Fitch expects the company to continue strengthening its competitive position, driven by subscriber growth in its household fixed and mobile businesses, which together are expected to represent close to 65% of total revenues, while its B2B business will contribute with close to 26% of total revenues during 2016 - 2019. This will lead to a modest increase in its EBITDA margin over 29% in 2017 - 2019, supported by the positive performance of its fixed business and the realization of integration synergies with its subsidiaries, estimated at approximately 10% of the projected EBITDA.

CAPEX to Strengthen Operations

TIGO UNE's continued high investments to shore up its network competitiveness bode well for its long-term market position. The company plans to invest about COP 4 trillion during 2016 -2019 to meet the expected demand growth for fixed services and to expand its mobile network, in line with its strategy to offer convergent services to cope with the competitive environment.

This capex plan during 2016 - 2019 represents a lower capital intensity ratio of 18.5%, as a percentage of capex to projected revenues, which is lower than the average of 20% during 2012 - 2015, as a result of the investment sharing agreement to deploy its 4G LTE network. Fitch expects the company to post negative FCF in 2016, which is expected to turn modestly positive in 2017.

Stable Financial Profile

Fitch expects TIGO UNE's leverage to remain stable over the medium term, with the average leverage metric, measured by gross debt / EBITDA, of 2.3x during 2016 - 2019, which is modestly below the June 2016 metric of 2.5x. Fitch forecasts the ratio to close at 2.2x in 2019. The adjusted leverage metric, which reflects Fitch's adjustments for operational leases, is expected to average at 2.4x during the same period, which compares to 2.7x as of June 2016. This is based on Fitch's expectation that the company will maintain a debt level of approximately COP 4 trillion and generate an average EBITDA of close to COP1.6 trillion during 2016 - 2019.

Parent Subsidiary Relationship

Millicom International Cellular (News - Alert) (MIC), the controlling shareholder of TIGO UNE, is a holding company that relies on the upstreaming of dividends from its subsidiaries. Fitch considers that a Parent and Subsidiary relationship exists given the control the former exercises over TIGO UNE, which exposes it to dividend distributions that could pressure its free cash flow generation. TIGO UNE is MIC's largest subsidiary operation with a 22% EBITDA contribution to the Millicom group as of June 30, 2016.

Despite the absence of a ring fencing mechanism to limit TIGO UNE's cash upstream to its controlling shareholder, Fitch does not expect this relationship to impair TIGO UNE's ability to continue to execute its capex strategy while maintaining a credit profile in line with the current rating level. TIGO UNE operates in a highly competitive telecom sector, with underpenetrated non-traditional services that will require the company to continue investing in network expansion, a condtion Fitch expects to lead to sufficient cash preservation at the subsidiary level to execute its investment strategy.



KEY ASSUMPTIONS

--Revenues grow at an average of 4.8% in 2017 - 2019;


--Cost structure improves as a percentage of revenues;

--Projected EBITDA margin of approximately 29%;

--Capex intensity of 18.5% of revenues in 2016 - 2019;

--Projected average adjusted leverage of approximately 2.0x EBITDA.

RATING SENSITIVITIES

Considerations that could lead to a negative rating action (Rating or Outlook):

--Additional capex needs funded with debt;

--EBITDA margin erosion due to lower than expected synergies, increasing competitive pressures, and deteriorating macroeconomic conditions;

--Adjusted leverage above 3x without a clear deleveraging path;

--Higher than expected Dividend distributions that leads to negative free cash flow generation;

--Weaker credit profile of its controlling shareholder.

Considerations that could lead to a positive rating action (Rating or Outlook):

--Fitch does not foresee a positive rating action given the current two notch differential between the IDRs of the company and its controlling shareholder, MIC.

LIQUIDITY

TIGO UNE's liquidity profile is strong given its well spread-out debt maturities profile, with less than 10% of total debt coming due within the next 12 months. The company has stable CFFO generation, which has averaged over COP 1 trillion pesos since 2014 and its readily-available-cash balance amounted to COP749 billion, equivalent to USD 244 million as of June 2016, providing ample coverage to short term financial obligations. The company's liquidity is further bolstered by its available non-committed local and international lines of credit of COP1.6 billion and USD500 million, respectively, as of September 2016.

FULL LIST OF RATING ACTIONS

Fitch has rated the following:

UNE EPM Telecomunicaciones S.A. (TIGOUNE)

--Long-Term Foreign Currency IDR 'BBB'; Stable Outlook;

--Long-Term Local Currency IDR 'BBB'; Stable Outlook;

Fitch currently rates UNE EPM Telecomunicaciones S.A. (TIGOUNE) as follows:

--National Long-Term Rating 'AAA(col)'; Stable Outlook.

Date of Relevant Committee: Oct. 12, 2016.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013459

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013459

Endorsement Policy

https://www.fitchratings.com/regulatory

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