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Fitch Assigns First-Time 'BB-' to VTR Finance; Outlook Stable
[December 07, 2016]

Fitch Assigns First-Time 'BB-' to VTR Finance; Outlook Stable


Fitch Ratings has assigned VTR Finance B.V. (VTR) Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDR) of 'BB-'. The Rating Outlook is Stable. Fitch has also assigned a 'BB-' to the company's USD1.4 billion senior secured notes due 2024 and revolving credit facility.

KEY RATING DRIVERS

VTR's ratings reflect its strong market position in the Chilean telecom industry in Chile, primarily Pay TV and Internet services. VTR's ratings are supported by its competitive network quality, brand recognition, and successful commercial strategy for its bundled services offerings. The company's cash flow generation is relatively stable, despite a highly competitive environment, and it boasts strong financial flexibility underpinned by its long dated debt maturity profile and committed credit facility.

The ratings are tempered by its moderately high leverage for the rating level, pressured free cash flow (FCF) generation in the short to medium term due to high capex, a mature and highly competitive industry backdrop, and a lack of service diversification compared to the other integrated telecom operators in the country.

VTR is a wholly owned subsidiary of Liberty Global (News - Alert) plc (LG), and is a part of the LiLAC Group (LiLAC), which represents LG's Latin America and Caribbean operations. The company benefits from the strategic oversight by LG and its management expertise, as well as procurement and operating synergies. LiLAC operating entities are separately capitalized and operations are managed independently. LG maintains the common group leverage target of 4.0x-5.0x for its subsidiaries, which is slightly higher than the company's current leverage. Fitch believes that any material improvement in the company's financial profile from the current level would be difficult as any significant deviation from the group's financial target could be limited.

Strong Market Position:

VTR is the leading provider of pay TV and broadband services in Chile, with subscriber market shares of 35% and 37% on a national basis, respectively, followed closely by its main incumbent competitor, Telefonica (News - Alert) Chile S.A., as of June 30, 2016. VTR is also the second largest fixed-line telephony service provider, with a 20% of subscriber market share during the same period. The company has consistently increased its overall revenue generating units (RGU) in recent years, backed by its effective bundled product strategy based on network and service competitiveness. In the mobile service, the company operates as a virtual network operator (MVNO) with a low market share of just 1%. Fitch does not expect any material cash flow contribution from this segment in the short to medium term.

Stable Operating Performance:

VTR's performance has remained solid through the combination of continued ARPU growth and subscriber expansion. The company's revenue growth averaged 6% during 2013-2015 with solid EBITDA margin improvement to 39% from 36% during the period, and the trend has continued during the first nine months of 2016. This solid performance has been entirely achieved by growth in its Internet and pay TV services, which have fully offset reductions in fixed-line telephony services revenues due to the ongoing mobile-fixed substitution trend. Fitch expects the company's revenue growth to continue over the medium term, with relatively stable EBITDA margins of 37%-38% over the medium term.

High Capex:

Fitch does not expect any meaningful FCF generation over the medium term due to high capex requirements. While Fitch believes that VTR should continue to enjoy strong growth of data and pay TV services in the Chilean market, given its attractive range of services and its solid market position, the competitive pressures could increase for subscriber acquisition amid increasing market maturity. To ensure its service quality and to increase coverage, Fitch expects the company to increase its capital investment, measured by capex to sales, to about 22% during 2016-2018, compared to 19% in 2015.

Stable Leverage:

VTR's financial leverage is deemed moderately high for the rating level. The company's debt is mostly comprised of its USD1.4 billion senior secured notes due 2024, which were issued in 2014. The proceeds were used to pay off debt at UPC Holding B.V., which is LG's European subsidiary and credit pool. The company's adjusted debt to EBITDAR was 3.8x, including the net fair value of hedge derivatives, as of Sept. 30, 2016, which was a modest improvement from 4.2x at end-2014 due to EBITDA improvement. Fitch expects the company's leverage to remain stable during 2016-2018, barring any material amounts of cash paid to the parent, as its suppressed FCF generation to be offset to a degree by continued modest growth in EBITDA.

DERIVATION SUMMARY

VTR's lack of service diversification amid the mature market conditions in Chile, and its moderately high leverage compared to the more diversified competitors in Chile and the regional peers in the 'BB' rating category are credit negatives. Also, LG's group financial policy is a constraint on VTR's ratings. These weaknesses are mitigated to a degree by its leading market positions and solid network competitiveness, and financial flexibility, all of which are deemed solid for the rating level. No country ceiling, parent-subsidiary linkage, or operating environment aspects impact.

KEY ASSUMPTIONS

--Mid-single digits revenue growth over the medium term, with strong growth in Internet services and Pay TV;

--Capex-to-sales ratio to remain at around 22% ;

--No meaningful FCF generation in 2017-2018;

--EBITDA margin in the range of 37%-38% during 2016-2018;

--Adjusted net debt to EBITDAR ratio to remain below 4.0x over the mediu term.



RATING SENSITIVITIES

Future Developments that May, Individually or Collectively, Lead to Negative Rating Action


--Deterioration in operating performance leading to muted revenue growth amid margin erosion;

--Sustained negative FCF generation amid higher-than-expected capex requirement;

--Any material cash flow upstream to LG;

--Its adjusted net leverage increasing toward 4.5x on a sustained basis.

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action

--Continued solid top-line growth along with margin expansion, and positive FCF generation;

--Clear commitment for deleveraging in the absence of any material cash flow upstream to LG, resulting in its adjusted net leverage falling well below 3.5x on a sustained basis.

LIQUIDITY

VTR's liquidity profile is sound as the company does not face any debt maturity until 2024 when its senior secured notes become due. The company's cash balance amounted to CLP75.7 billion (USD114 million) by end-September 2016, and its operational cash flow generation is relatively stable. In line with other LG operating subsidiaries, the Chilean operating subsidiaries of VTR has a senior secured credit facility of USD160 million and CLP22 billion in place, which remains undrawn and supports its financial flexibility, if necessary.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings.

VTR Finance B.V

-- Long-Term Foreign Currency and Local Currency IDRs 'BB-'/Outlook Stable;

-- USD1.4 billion senior secured notes 'BB-'.

-- Secured revolving credit facility 'BB-'.

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=1016076

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016076

Endorsement Policy

https://www.fitchratings.com/regulatory

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