CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed America Movil S.A.B. de C.V.'s (AMX) and Telefonos de Mexico S.A. de C.V.'s (TMX) local and foreign currency Issuer Default Ratings (IDRs) and senior unsecured notes at 'A'. Fitch has also affirmed AMX and Telmex Internacional S.A.B. de C.V. (Telint) national scale ratings and senior unsecured Certificados Bursatiles and notes at 'AAA(mex)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
AMX's ratings reflect its position as the largest wireless service provider in Latin America, high degree of geographical cash flow diversification, well-established multiple service platforms and network infrastructure, strong financial profile backed by consistent positive free cash flow (FCF) generation, as well as ample financial flexibility and solid liquidity. Ratings are tempered by increasing competitive and regulatory pressures in some of its key markets, recent increase in leverage due to the acquisitions and shareholder distributions, as well as price pressures in voice services.
Medium Term Net Leverage Solid at 1.5x
The ratings reflect AMX's commitment to reduce its net leverage to below 1.5x, which Fitch believes is achievable over the medium term given the company's solid FCF generation. The company is expected to keep financial discipline with respect to cash flow usage in order to achieve its financial target in the absence of any sizable acquisitions or significant increase in shareholder distributions. For the LTM ended June 30, 2014, AMX reduced its net debt-to-EBITDA ratio to 1.5x, which compares favorably to 1.7x at the end of 2013, achieved by a combination of stable cash flow generation and the sale of part of its stake in Koninklijke KPN N.V. (KPN). The company's total net debt decreased to MXN412 billion as of June 30, 2014, from MXN442 billion at end-2013.
In May 2014, AMX launched a tender offer to increase its ownership in Telekom Austria (TKA) which cost about EUR743 million, equivalent to about MXN12.9 billion. As a result, the company increased its stake to 50.8% from 27.3% and will start consolidating the operation starting in July 2014. The impact from the tender offer and the consolidation should not be material on AMX's financial profile as the increase in net leverage is estimated to be only about 0.1x-0.2x. In 2013, TKA generated EUR4.2 billion revenues and EUR1.3 billion EBITDA, which would have represented 8.5% and 8% of AMX's 2013 pro forma consolidated revenues and EBITDA, respectively. TKA held EUR3.7 billion net debt, equivalent to MXN51 billion, as of June 30, 2014, which is about 12% of AMX's net debt.
Regulatory Pressures in Mexico:
AMX's Mexican operation is subject to asymmetrical regulations as a result of the ongoing telecom sector reform in which the company was declared 'preponderant' in March 2014. The secondary laws were approved in July 2014 and fleshed out the implementation measures, mainly including reductions in interconnection and roaming charges, as well as sharing of AMX's network infrastructure. While this will result in increased competition over the medium to long term and likely pressure AMX's profitability in Mexico, the outright financial impact should not be material as Fitch estimates the revenue loss from this to be less than 2% of the company's consolidated revenues in 2014. In addition, AMX's well-diversified operational geographies largely mitigate the impact.
In July 2014, AMX announced its plan to decrease its Mexican market share to below 50% by selling operational assets in order to cease to be a preponderant operator. The company has clearly indicated that the planned divestiture will take place only at a fair market value and if the company will be allowed to provide convergent services, including pay-TV, without being subject to unfavorable regulations following the asset sale.
While the impact from the asset disposal can be better assessed when more details become available going forward, the reduction in cash flow generation in Mexico could be largely offset if the company reinvests the cash proceeds in other services, or geographies, with higher growth potential than the maturing Mexican telecom industry where increasing competitive and regulatory pressures are evident. In addition, if deemed necessary, AMX could use a portion of the proceeds to improve its financial profile in line with its stated target.
Solid Operating Results
AMX has continued to maintain stable revenues and EBITDA growth during the first half of 2014 (1H'14) despite the increasing pricing pressures on voice and negative exchange rate movements in some of its key markets. The company has aggressively invested since 2011 in upgrading its fixed/mobile networks across the region to provide attractive bundled fixed product offerings, as well as to improve mobile data user base and revenues. As a result, the revenue contributions from fixed-line services, excluding voice, and wireless data represented 23% and 26% of the consolidated revenues, respectively, during the second quarter of 2014 (2Q'14), which are significant improvements from 15% and 17%, respectively, during the fourth quarter of 2011 (4Q'11). As these segments fully offset the declining voice revenues, AMX has managed to improve its revenues and EBITDA by 2.7% to MXN398 billion and 2.1% to MXN132 billion, respectively, in 1H'14 from a year ago.
AMX is likely to continue its solid positive FCF generation over the medium term, underpinned by stable cash flow from operations (CFFO), projected by Fitch to be around MXN190 billion annually in 2014 and 2015, fully covering the annual capex budget of MXN120 billion-MXN130 billion. The company's pre-dividend FCF would be used to maintain a conservative capital structure with a modest shareholder return in the form of dividends or share buyback. During 2013, the company's FCF amounted to MXN31 billion (USD2.4 billion) after capex of MXN118 billion (USD9.1 billion) and dividends of MXN86 billion (USD6.7 billion).
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Increased regulatory and competitive pressures across its operational geographies leading to significant erosion in its market positions and operating margins.
--Aggressive shareholder return policy in terms of both dividends and share buybacks.
--Sizable investments/acquisitions leading to weak cash generation over the medium to long term.
--Net leverage increasing above 1.5x-2.0x on a sustained basis as a result of the aforementioned factors.
Considerations that could lead to a positive rating action (Rating or Outlook):
Ratings upgrades are not likely in the short to medium term due to the competitive/regulatory operating environment, and increased leverage.
Fitch affirms the following ratings:
--Local currency IDR 'A';
--Foreign currency IDR 'A';
--Senior notes issuances 'A';
--Subordinated notes issuances 'BBB+';
--Mexican national scale rating 'AAA(mex)';
--Certificados Bursatiles issuances 'AAA(mex)';
--UF30 million Chilean Notes Program N#474, including Series A and D issuances for a combined amount of UF9 million, 'AA+(cl)'.
Telefonos de Mexico
--Local currency IDR at 'A';
--Foreign currency IDR at 'A';
--Senior notes issuances at 'A'.
--Mexican national scale rating at 'AAA(mex)';
--Mexican national scale short term rating at 'F1+(mex)';
--MXN20 billion Dual Certificados Bursatiles Program at 'AAA(mex)/F1+(mex)';
--Certificados Burstiles issuances with ticker symbol TELINT09-2 at 'AAA(mex)'.
Simultaneously, Fitch has withdrawn the 'A(exp)' and 'AAA(mex)(exp)' expected ratings on America Movil's MXN15 billion proposed senior notes due to the suspension of the expected debt issuance.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', May 28, 2014;
--'National Scale Rating Criteria', Oct 20, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
National Scale Ratings Criteria