Fitch Affirms Empresa de Telecomunicaciones de Bogota's IDRs at 'BBB- '; Outlook Stable [Professional Services Close - Up]
(Professional Services Close - Up Via Acquire Media NewsEdge) Fitch Ratings has affirmed Empresa de Telecomunicaciones de Bogota S.A. E.S.P.'s (ETB) ratings as follows:
--Long-term foreign- and local currency Issuer Default Ratings (IDRs) at 'BBB-';
--COP530 billion senior notes due 2023 at 'BBB-';
--National long-term rating at 'AAA(col)'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
ETB's ratings are supported by its sound credit profile, Fitch's expectation for stable cash from operations (CFO) over the medium term, weakening but still moderate leverage for the rating level, and its entrenched position in the fixed line service in Bogota. Conversely, the ratings are tempered by increased competition, mobile substitution, limited diversification in geography and service revenue, as well as aggressive investment plans over the medium term.
Increase in leverage
Fitch forecasts that ETB's financial net leverage will continue to increase over the medium term due to increases in capex and rental expenses, but it will still remain commensurate with the current rating level. The company plans to invest over COP 800 billion annually in 2014 and 2015, which accounts for over 50 percent of its revenues projected in the period, to upgrade its fixed-line network to fibre-to-the-home (FTTH), and to launch its own fourth-generation (4G) mobile service. With its EBITDA generation expected to be around COP 550 billion, the investment plan will cause the company's FCF generation to remain negative in 2014 and 2015. However, Fitch does not believe the company needs to rely on external financing to support this due to its large cash balance of 1,036 billion as of Dec. 31, 2013.
In addition, Fitch expects the company's rental expense to increase to about 9 percent of its revenue from 2015, from historical 7 percent, due to the launch of the 4G mobile service. The company has entered into an agreement with other telecom operators in Colombia to jointly develop and share the mobile network. With a higher rental expense, which Fitch incorporates as the adjusted off-balance-sheet debt, the company's total debt amount is likely to reach close to COP 1.5 trillion by 2015. This, together with a reduced cash balance due to negative FCF, will raise the company's financial net leverage, measured by EBITDAR to total adjusted net debt, well over 1x by 2015 from only 0.3x as of Dec. 31. 2013.
Limited Short-Term Benefit from New Services
Fitch believes that the benefit from the company's strategic investment plan to diversify its product offerings and provide convergent services could be limited in the short term given the competitive pressure. As the competition has increasingly become more centered on pricing for fixed-line bundling services including pay-TV, a positive impact from a higher quality of service with ETB's FTTH network may not be enough to curb the declining ARPU trend. In addition, as a new entrant in the already mature and highly competitive mobile market, it will be challenging for the company to achieve a meaningful subscriber base in the short to medium term. Therefore, it is Fitch's view that the company's strategy of offering integrated services, amid the continued revenue contraction in the most profitable fixed-voice service, would require significant marketing efforts for subscriber acquisition. As such, Fitch does not foresee any significant improvement in the company's cash generation over the medium term.
Margin Erosion Continues
ETB's operating results continues to be negatively affected by the revenue decline in its core services, such as fixed-voice, internet, as well as data. In 2013, the company managed to grow its revenues by 1.3 percent but the growth only came from the special service segment, which mainly includes IT services and equipment leases provided to national and Bogota entities. With weak results from its core operation, the company's profitability continued to be eroded with EBITDAR margin falling to 48 percent in 2013 from 52 percent in 2012. Fitch believes that the margin will continue to decline toward 45 percent over the medium term as a result of a high level of competition, as well as an unfavorable change in the revenue mix with introduction of lower margin services, such as pay- TV. However, Fitch acknowledges that ETB's operating margin, even at this deteriorated level, still compares favorably to its regional peers.
Strong Liquidity Position
ETB's liquidity profile is strong underpinned by its large cash balance, stable cash flow generation from operation, as well as a long maturity schedule of its debt. As of Dec.31, 2013, the company held cash balance of COP 1 trillion which comfortably covered the company's total gross debt of COP 530 billion. In addition, its liquidity will benefit further from the sale of its 25 percent stake in Colombia Movil for USD 240 million, payment of which likely to be received in 2014.
A positive rating action is unlikely at the moment given the increase in leverage and expectation of negative FCF over the next few years.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Inability by ETB to mitigate weak revenue growth and profitability deterioration, and/or debt-funded large investment resulting in its financial net leverage, measured by EBITDAR to adjusted net debt over 1.5x, on a sustained basis.
Additional information is available at 'fitchratings.com'.
Applicable Criteria and Related Research:
--'National Ratings Criteria, Oct. 30, 2013.
--'Corporate Rating Methodology', Aug. 5, 2013.
--'Parent and Subsidiary Rating Linkage', Aug. 5, 2013.
--'Rating Telecom Companies', Aug 9, 2012.
Applicable Criteria and Related Research:
National Scale Ratings Criteria
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Telecom Companies
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