CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Telefonica Celular del Paraguay S.A.'s (Telecel) foreign-currency Issuer Default Rating (IDR) at 'BB' with a Stable Rating Outlook. Fitch has also affirmed the company's USD300 million senior unsecured notes due 2022 at 'BB'.
KEY RATING DRIVERS
Telecel's ratings reflect its leading market positions in Paraguay supported by the extensive network and sales coverage, diverse service offering, and strong brand recognition of Tigo. These competitive strengths have enabled stable cash flow generation from operation and high operating margins resulting in the company's strong financial profile with low leverage, which is low for the rating category.
Telecel's ratings are constrained by the Paraguayan country ceiling of 'BB' based on its limited geographic diversification. Increasing competitive pressures also temper the company's credit quality.
The ratings factor in Telecel's strong linkage with its parent, Millicom International Cellular S.A. (MIC) (rated 'BB+'/Stable Outlook), which fully owns it. Although Telecel benefits from synergies related to MIC's larger scale and management expertise, the company's payment of management fees and high dividends to the parent weakens its cash flows.
Leading Market Position:
Telecel is the largest telecom operator in Paraguay, with around 65% revenue market shares in mobile, broadband, and pay-TV services. As the first mobile operator in the country in 1992, the company has established an entrenched position with the most extensive network and distribution channel coverage under its strong 'Tigo' brand, shared among Millicom group companies globally. Telecel has strengthened its competitive position through the acquisition of Cablevision in 2012, which expanded its service portfolio with pay-TV and fixed-broadband and enabled operational synergies. These competitive advantages should allow the company to maintain its market leadership over the medium term despite increasing competitive pressures.
Leverage to Remain Low:
Fitch forecasts Telecel's strong financial profile to remain intact over the medium term backed by its stable operational cash flow generation albeit a weakening trend. The company has low leverage for the rating category, with its net debt to EBITDA ratio at 0.9x as of Sept. 30, 2014, which is a slight increase from 0.6x at end-2013. Despite the continued negative free cash flow generation over the medium term due to high capex and shareholder distributions, the impact would not be material as Fitch forecasts Telecel's net leverage to increase to just above 1.0x.
Negative FCF:
Telecel's on-going negative FCF generation is unlikely to reverse in the medium term largely due to its high capex plan. Fitch expects the company's annual capex to increase to about USD120-130 million during 2014-2015, which compares to USD87 million in 2013. The investments will be mainly for expansion of mobile and fixed networks coverage and capacity, spectrum acquisitions, as well as additional store openings. In addition, an increased level of shareholder distributions, in terms of both dividends and technical service fees, would continue to pressure free cash flow generation into the negative territory.
Revenue Diversification Underway:
Telecel's main mobile business faces weak growth ahead as ARPU continues to fall due to competition and market maturity. The mobile penetration rate in Paraguay is estimated to have reached 98% as of September 2014. Positively, Fitch expects the company's broadband and pay-TV segment to continue double-digits revenue growth as demand remains strong given low penetrations of these services. This positive revenue diversification should largely mitigate negative mobile service growth and enable low single digits revenue growth over the medium term.
Margin Erosion:
Telecel's profitability should continue to deteriorate over the medium term due to an increased level of technical service fees to MIC amid intense competition and weak mobile revenue growth. The company's EBITDA margin, after fees paid to MIC, declined to 42.6% in the LTM ended Sept. 30, 2014, which compares to 51% in 2013, and could continue to fall to below 40% should an aggressive payments to its parent persist. During the first nine months of 2014, the company's technical service fees increased to USD54 million (PYG241 billion), representing about 10% of revenues during the period, which compares to just USD11 million (PYG48 billion) during 2013, accounting for 1.5% of revenues. Also, an increasing revenue contribution from the lower margin pay-TV and broadband businesses would pressure the margins.
Sound Liquidity:
Telecel's solid liquidity profile is supported by its stable cash flow generation from operation, high cash balance, and long debt maturities schedule. The company held readily-available cash balance of USD68 million, which fully covered its short-term debt maturities of USD19 million. Telecel does not face any significant debt maturity until 2022 when its USD300 million senior notes becomes due; these notes represented more than 90% of the company's total debt as of Sept. 30, 2014.
RATING SENSITIVITIES
Considerations that could lead to a negative rating action (Rating or Outlook):
--Deterioration in the company's EBITDA and FCF generation along with weak revenue growth due to competitive pressures, including material loss in mobile market share, ARPU erosion, and substantial increase in marketing expenses;
--Aggressive shareholder distributions in terms of both technical fees and dividends;
--A persistent level of higher-than-expected capex;
--All of which resulting in Telecel's adjusted net leverage above 3.0x in conjunction with a weak liquidity profile on a sustained basis.
Considerations that could lead to a positive rating action (Rating or Outlook):
--The ratings are constrained by the Paraguayan country ceiling of 'BB'.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', May 28, 2014.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=941075
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