MONTERREY, Mexico--()--Fitch Ratings has assigned an Initial Issuer Default Rating (IDR) to Millicom International Cellular, S.A. (MIC, or Millicom) and to MIC Africa BV as follows:
-Local Currency IDR 'BB+';
-Foreign Currency IDR 'BB+'.
MIC Africa BV
-USD510 million Senior Notes due 2020 'BB+(exp)'.
The Rating Outlook is Stable.
MIC's ratings reflect the company's geographically diversified portfolio, leading market positions in most of its markets, value-added services orientation, expectation of moderate leverage, good liquidity and pre-dividend free cash flow (FCF) generation. The ratings are tempered by exposure to markets with low sovereign ratings and low GDP per capita, pricing pressures, debt allocation between subsidiaries and holding company, shareholder returns policy and recent M&A activity.
The rating of the USD510 million senior unsecured notes to be issued by MIC Africa incorporates the downstream guarantee of parent company MIC and upstream guarantee from the subsidiaries of Tanzania, Senegal, Ghana, DRC and Chad (the restricted group). These subsidiaries are expected be FCF negative during 2013 and 2014 as they increase capital expenditures. Proceeds from the notes will be used to refinance existing debt and capital expenditures at the African subsidiaries.
MIC's rating reflects its leading positions in the majority of its markets, resulting in positive FCF generation. For the 12 months ended Sept. 30, 2012, approximately 65% of EBITDA was generated in countries where the company has the leading market share in mobile services. Strong brand recognition and extensive distribution networks help the company mitigate a strong competitive environment, particularly in mobile voice. The company's focus on growing value-added services (VAS) should also alleviate pressures from voice revenues, especially in Latin American markets where penetration is approaching a mature stage.
The ratings incorporate the company's exposure of its operations to countries with low sovereign ratings, which tend to be more politically unstable and more volatile in terms of economic growth. This adds currency risk, as part of its debt is denominated in USD and cash flow is generated in local currencies. For the 12 months ended Sept. 30, 2012, approximately 82% of EBITDA and 84% of operating FCF was generated by Central and South American operations. The African operations, with the exception of Tanzania, are not expected to generate significant cash flow over the next few years.
The company's strategy involves developing VAS services further as traditional mobile service matures. During 2012 MIC restructured its business segments in each country by product category in order to focus on new revenue sources, including data and mobile financial services, among others. In addition, the company acquired CATV provider Cablevision Paraguay and entered into an agreement to acquire an initial 50% stake in Rocket Internet, which has operations in Latin America and Africa.
Recent M&A activity follows MIC's approach to complementing its existing service portfolio; however, it should result in higher leverage levels. Fitch views the acquisition of Cablevision Paraguay for USD150 million to strengthen the competitive position in that country as positive, as it will complement its mobile service offering. Cablevision Paraguay should add approximately US$50 million in revenues and USD20 million in EBITDA per year. In addition, the agreement to acquire a 50% stake in Rocket for EUR340 million through three yearly disbursements can help Millicom to explore new revenue sources in the future.
Fitch is concerned that the investment in Rocket could require additional capital injections, which could cause MIC's leverage to increase. However, MIC does not expect Rocket to become EBITDA neutral until 2015. The company acquired a 20% stake in Rocket's Latin America Internet Holdings (LAH) and Africa internet Holdings (AIH) for EURD85 million and has options to acquire an additional 15% for EUR85 million by September of 2013 and an additional 15% for EUR170 million by September of 2014 which would increase its stake to 50% in both companies. MIC has also an option to acquire the remainder 50% by September of 2016 depending on the performance of the business.
Operating performance has come under pressure due to the strong competitive environment in Central America, data investments in South America, and currency devaluation in Africa. Fitch expects EBITDA margins (after corporate costs) should approach 40% in the medium term. Pricing pressures in Central America particularly in El Salvador are expected to continue. Subsidies in South America and the introduction of a tax on revenues in Bolivia have also pressured margins.
The ratings incorporate that MIC's net debt to EBITDA (after corporate expenses) should be close to 1.5x over the long term. For the 12 months ended Sept. 30, 2012, net debt to EBITDA was 0.9x and funds from operations (FFO) adjusted net leverage stood at 1.4x. The ratings take into account the company's shareholder distribution policy, with Fitch expecting that any excess cash flow generation will be returned to shareholders in the form of dividend payments or share buybacks. Shareholder distributions totaled US$869 million for the last 12 months ended Sept. 30, 2012. MIC Africa's restricted group is expected to have a total debt to EBITDA below 2.0x and should not turn FCF positive until 2015, when it is expected to begin to upstream excess cash to the parent.
MIC has historically maintained a strong liquidity position with high cash balances. Total consolidated cash as of Sept. 30, 2012 was USD970 million. Total on-balance-sheet debt of USD2.8 billion was allocated to the operating companies, with 29% being guaranteed by MIC; however, the issuance of SEK2 billion during the last quarter of 2012 is allocated to the holding company. Fitch expects that over the medium term most of the debt will continue to be allocated to the operating companies and only a small proportion allocated to the holding company. Debt maturity profile should be manageable given the company's liquidity position, pre-dividend FCF, and debt maturity profile.
--Positive factors for MIC's credit quality include a strong management commitment toward net debt to EBITDA of 1.0x over the long term.
--Negative factors for credit quality include an increase in net debt to EBITDA to 2.0x without a clear path to deleveraging as a result of a single or combination of M&A actions, additional funding to Rocket, increased shareholder distributions or competitive pressures.
Additional information is available 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Telecoms Companies', Aug. 9, 2012;
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', Aug. 10, 2012.
Applicable Criteria and Related Research:
Rating Telecom Companies
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage