Fitch Rates Millicom's Proposed USD500MM Notes 'BB+(EXP)'

CHICAGO--()--Fitch Ratings expects to rate Millicom International Cellular, S.A. (MIC)'s proposed USD500 million senior unsecured notes due 2025 'BB+(EXP)'. Proceeds from the issuance are expected to be used mainly to fully redeem the USD311 million outstanding balance of the El Salvador notes, which were issued by Telemovil Finance Co., Ltd. and fully guaranteed by Telemovil El Salvador, S.A., MIC's wholly owned subsidiary. The rest of the proceeds will be used for general corporate purposes and capex.

KEY RATING DRIVERS

MIC's ratings reflect the company's geographical diversification, effective marketing strategy and strong brand, and extensive network and distribution channels, all of which have contributed to its leading market positions in key markets, steady subscriber growth, and solid pre-dividend free cash flow (FCF) generation. In addition, MIC's increasing investments in the under-penetrated fixed-line services bode well for its medium to long term revenue growth.

Despite these diversification benefits, MIC's ratings are constrained by the company operating only in Latin America and Africa, which have low sovereign ratings and GDP per capita. The ratings are also tempered by the company's increasing leverage due to recent M&A activities, historically-high shareholder returns, and debt allocation between subsidiaries and the holding company.

Increased Leverage

MIC's leverage is weak for its rating level. The company's leverage has materially increased in recent years mainly due to acquisitions and historically high shareholder distributions. In August 2014, the company completed its merger between its Colombian subsidiary and UNE EPM Telecomunicaciones S.A. (UNE), the Colombian fixed-line operator, which increased the company's net debt by USD1.2 billion. As a result, its net leverage, measured by adjusted net debt to EBITDAR, increased to 2.3x as of Dec. 31, 2014; this unfavorably compares to 0.8x and 1.4x at end-2011 and end-2012, respectively.

Positive FCF From 2015

Fitch forecasts MIC's leverage to fall to a level that is in line with the current rating level over the medium term as the company continues to refrain from aggressive shareholder payouts and share buybacks amid EBITDA improvement. The company paid only USD264 million dividends annually in 2013 and 2014, which was a sharp reduction from USD731 million including share repurchase in 2012 and USD991 million in 2011. As MIC remains committed to reducing its leverage, Fitch expects total shareholder dividends in 2015 and 2016 to remain in line with the 2014 level. In addition, capex should remain relatively flat at around USD1.4 billion over the medium term representing about 18%-19% of revenues, which is a decline from 22.5% in 2013. These will lead to modest positive FCF generation and help the company reduce its net leverage towards 2.0x by 2016.

A slower-than-expected deleveraging due to a lack of the company's commitment to restraining dividends, acquisitions, or a further deterioration in its operating performance will immediately place negative pressure on the ratings.

Enhanced Competitive Position in Colombia

The merger with UNE, the second largest fixed broadband and pay-TV operator in Colombia, will strengthen MIC's market position as UNE's fixed-line network and products complement MIC's existing mobile operation in terms of both geography and products offerings with operational cost savings. This synergy is important for MIC as Colombia has been the fastest growing market in terms of revenue contribution among MIC's markets. Although any dividend upstream is not likely for the foreseeable future given the high investments needed in Colombia, the addition of UNE will help MIC turn around its EBITDA growth going forward.

Margin Erosion

MIC's EBITDA margin is likely to continue to deteriorate in 2015 due to competition, as well as increasing revenue proportions of lower margin fixed-line services and handset sales. Mobile ARPU is trending downwards in all of its operational geographies amid increasing market saturation in Latin America. The increasing penetration of lower margin fixed-line business will also place pressure on profitability. Some of the increase in fixed line revenue is attributable to the merger with UNE. MIC's EBITDA margin fell to 32.6% in 2014, in line with the 2013 level, which unfavorably compares to 40% in 2012. Positively, EBITDA growth has turned around during 2014 following contractions in 2013 and 2012. MIC's EBITDA grew to USD2.1 billion in 2014; this compares to USD1.7 billion in 2013 and USD1.9 billion in 2012, respectively.

Concentration in Low-Rated Sovereigns

Despite the diversification benefit, MIC's ratings are constrained by its operational footprint in only Latin America and Africa with low sovereign ratings and GDP per capita. The operational environment in these regions, in terms of political and regulatory stability and economic conditions, tend to be more volatile than developed market which could potentially adversely affect MIC's operations. This also adds currency mismatch risk as 66% of MIC's total debt at end-2014 was based on USD while most of its cash flows are generated in local currencies in each country.

Leading Market Positions

MIC has retained its market leadership in most of its key cash generating operating companies in Latin America and Fitch expects these positions to remain intact over the medium term backed by its effective marketing strategy, strong brand recognition, and extensive network and distribution channels. The company has maintained a steady subscriber base expansion, adding 2.3 million new mobile subscribers in the fourth quarter of 2014, and its increasing investment into fixed-line and media will help provide increasing cross-selling opportunities to acquire more revenue generating units going forward.

Diversifying Revenue Mix

MIC's growth strategy will be increasingly centered on mobile data, fixed internet and pay-TV services as it tries to alleviate pressure on the traditional voice/SMS revenues. The mobile data customer base reached 27% of total subscribers as of Dec. 31, 2014, from 20% a year ago, which supported a 34% mobile data revenues growth during 2014 from a year ago. Broadband and pay-TV businesses also maintained solid growth, largely due to UNE, as the segmental revenues grew by 111% in 2014 from a year ago. As this trend continues, Fitch forecasts mobile service revenues to account for less than 70% of total revenues from 2015, which compares to 83% in 2013.

Sound Liquidity

MIC's liquidity profile is good given its readily available cash position fully covering the short-term debt maturities, as well as its well-spread debt maturities. As of Dec. 31, 2014, the consolidated group's readily available cash was USD694 million, which compares to its short-term debt of USD362 million. The group's total on-balance sheet debt was USD4.8 billion, with 32% allocated to the holding company. Debt maturities are well spread with an average life of 5.3 years. Fitch does not foresee any liquidity problem for both the operating companies and the holding company given operating companies' stable cash generation and their consistent cash upstream to the holding company. In addition, MIC has USD500 million undrawn credit facility which further bolsters its liquidity.

Dividend Streams Mitigate Structural Subordination

The creditors of the holding company are subject to structural subordination to the creditors of the operating subsidiaries given all cash flows are generated by subsidiaries, which held 68% of the total group debt at end-2014. Positively, Fitch believes that a stable and high level of cash upstream, mostly through dividend, by subsidiaries is likely to remain intact over the long term and help largely mitigate any risk stemming from this structural weakness. Subsidiaries' robust upstreams have supported the holding company's debt service coverage in line with that of the consolidated group financial profile.

KEY RATING ASSUMPTIONS

--Mid-singles digits annual organic revenue growth over the medium term;

--Cable & Digital Media segment to represent over 25% of consolidated revenues from 2015, compared to 16% in 2013, largely due to UNE consolidation;

--EBITDA margin to trend down to below 30% over the medium term due to competition and increasing revenue proportions of lower margin fixed-line services and handset sales;

--Annual capex to remain at about USD1.4 billion in 2015-2016, in line with the 2014 level;

--No significant increase in shareholder distributions in the short to medium term with annual dividend payments remaining at USD264 million in 2015 and 2016.

RATING SENSITIVITIES

Negative: MIC experiences an increase in net debt to EBITDAR above 2.5x without a clear path to deleveraging due to any one or combination of the following: M&A activity, aggressive shareholder distributions, and competitive/regulatory pressures on its operations.

Positive: MIC's financial net leverage improves towards 1.0x on a sustained basis due to improvement in operational competitiveness and resultant stronger cash generation, less aggressive shareholder returns, and a higher level of diversification in cash flow generations across geographies.

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=981053

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Contacts

Fitch Ratings
Primary Analyst
Alvin Lim, CFA
Director
+1-312-368-3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Sergio Rodriguez, CFA
Senior Director
+52-81-8399 9100
or
Committee Chairperson
Daniel Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alvin Lim, CFA
Director
+1-312-368-3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Sergio Rodriguez, CFA
Senior Director
+52-81-8399 9100
or
Committee Chairperson
Daniel Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com