MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB+(exp)' rating to Millicom International Cellular, S.A.'s (MIC) proposed senior unsecured notes. Proceeds from the notes will be used to fund the merger with UNE in Colombia, which is expected to be approved in 2014. Until the merger is approved, proceeds from the issuance will remain in an escrow account.
KEY RATINGS DRIVERS:
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 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 the holding company, shareholder returns policy and recent M&A activity.
MIC's rating reflects its leading positions in the majority of its markets, resulting in free cash flow generation. For the 12 months ended June 30, 2013 approximately two-thirds of EBITDA was generated in countries where the company has leading market share in mobile services. Strong brand recognition and extensive distribution networks help the company mitigate a very competitive environment, particularly in mobile voice services. The company's focus in growing data revenues as part of its strategy of evolving to a digital company from a communications company is aimed to alleviate pressures from voice revenues.
The ratings incorporate the company's operational exposure 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 MIC's debt is denominated in USD and cash flow is generated in local currencies. For the 12 months ended June 30, 2013, approximately 85% of EBITDA was generated by Central and South American operations. The African operations, with the exception of Tanzania, are not expected to generate significant cash flows over the next few years.
The company's strategy involves developing value added services (VAS) as traditional mobile services mature. During 2012 MIC restructured its business segments in each country by product categories to focus on new revenue sources, which include data and mobile financial services among others. In addition the company acquired cable television (CATV) provider Cablevision in Paraguay, entered into an agreement to acquire an initial 20% stake in Rocket Internet, a regional holding with operations in Latin America and Africa and during this year entered into an agreement with UNE in Colombia to merge their assets.
Fitch believes that a successful merger will improve the competitive position of the resulting entity in Colombia, as they offer complementary services. Pro forma net debt to EBITDA (including corporate expenses) should approximate to 1.7 times (x) after the transaction with UNE is completed. Fitch also believes there is some room to achieve synergies that could result in lower leverage levels over the medium term. MIC is expected to own a 50% minus 1 economic stake in the resulting entity but will consolidate the entire operation as it will have control and will appoint four of the seven board directors.
Fitch remains concerned that over the medium term the investment in Rocket could require additional capital injections, which could cause MIC's leverage to increase. The company does not expect Rocket to become EBITDA neutral until 2015, with EBITDA guidance for 2013 being negative in the range of USD125 million-USD150 million. MIC is committed to the exercise the option to increase the ownership in Rocket's Latin America Internet Holdings (LIH) and Africa Internet Holdings (AIH) to 35% from 20% for a combined EUR85 million (USD109 million). MIC has an option to increase its stake in Rocket to 50% by September of 2014 by an additional EUR170 million and also has an option to acquire the remaining 50% by September of 2016 depending on the performance and valuation of the business.
Pre-dividend FCF margins are expected to remain somewhat stable in the next few years. As MIC moves to lower margin businesses but less capital intensive, EBITDA margin is expected to trend towards 35% in the next few years, but it should be offset by lower capital expenditures. Operating performance has come under pressure due to mobile termination cuts in several markets, strong competitive environment in Central America, data investments in South America and currency devaluation in Africa.
Fitch expects MIC's net debt to EBITDA ratio (after corporate expenses) to be close to 1.5x over the long term. For the 12 months ended June 30, 2013 net debt to EBITDA was 1.3x. The ratings take into account the company's shareholder distribution policy, with Fitch expecting that any excess cash flow generation after ordinary dividends will be used to reduced leverage.
MIC has historically maintained a strong liquidity position with high cash balances. Total consolidated unrestricted cash as of June 30, 2013 was USD914 million. Total on-balance sheet debt was USD3.329 billion with USD784 million at the holding company level and the rest at operating companies, with 36% of total debt being guaranteed by MIC. Fitch expects that over the medium term most of the debt will continue to be allocated at the operating companies and a small proportion allocated at 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 towards a net debt to EBITDA of 1.0x over the long term.
--Negative factors for MIC's credit quality include an increase in net debt to EBITDA to 2.0x without a clear path to deleveraging due to a single or combination of M&A activity, additional funding to Rocket, and increased shareholder distributions or competitive pressures.
Fitch's existing ratings for MIC are as follows:
--Local Currency Issuer Default Rating (IDR) 'BB+';
--Foreign Currency IDR 'BB+';
--US500 million senior unsecured notes due 2020 'BB+'.
The Rating Outlook is Stable.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013;
--'Rating Telecom Companies', Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Telecom Companies