Fitch Affirms Telefonica Moviles Chile at 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Telefonica Moviles Chile S.A.'s (TMCH) foreign-currency and local currency Issuer Default Ratings (IDR) at 'BBB+'. Fitch has also affirmed the company's national long-term rating at 'AA(cl)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

TMCH's ratings reflect its leading market position in the Chilean mobile telecommunications market, strong brand recognition and network infrastructure, and sound financial profile backed by solid cash flow generation. The ratings also incorporate its linkage to the parent, Telefonica S.A. (TEF), and TEF's other Chilean subsidiary Telefonica Chile S.A. (TCH), also rated 'BBB+' by Fitch. TCH offers complementary fixed-line telecommunication services and allows TMCH to achieve synergies mainly in terms of costs and investments savings, brand unity, as well as sales coverage under the common management strategy. The ratings are tempered by the intense competitive landscape amid the industry maturity, and the company's shareholder distribution policy.

Mobile Internet Drives Growth:

Strong growth in mobile Internet and data services should fully mitigate ongoing contraction in the voice service revenues, tempered by competition and negative impact from the reduced access charges. TMCH's mobile internet subscriber base has been expanding rapidly, with an average growth rate of 17% during 2012-2014 followed by 10% during the first half of 2015 (1H15) compared to a year ago, enabling the mobile internet revenues proportion out of the total sales to improve to 26% during the period from just 11% in 2012. As a result, the company managed to improve its revenues by 2% during 1H15, compared to a year ago, while its EBITDA margin improved to 26% from 23% mainly due to lower interconnection and subsidy expenses. Excluding the reduced access charge impact, its revenues would have grown by 5% during the same period.

Given TMCH's ongoing aggressive investment into network improvement to support its growth strategy centered on data, Fitch expects this trend to continue over the medium term with the data users representing close to 40% of the total subscriber base and the segmental revenue proportion increasing to around 35% by end-2016. Fitch does not believe that ever-increasing demand for data will become subdued in Chile, in line with the global trend. This data-backed growth should enable low-single-digit revenue growth in the short to medium term despite competitive/regulatory headwinds.

Voice ARPU Erosion:

Revenue contraction in the voice segment is unlikely to be curbed over the medium term as the average revenue per user (ARPU) continues to trend down against the backdrop of high competition and industry maturity, with the mobile service penetration rates reaching over 145% in Chile, which is among the highest in the region. In addition, interconnection rates were further reduced by 16% in 2015 for all mobile operators, following a 75% cut in 2014; the negative impact was estimated to be about 3% of the company's revenues in 2014. Positively, the impact on the company's cash flow or EBITDA would be marginal as the company's interconnection fees paid to other operators should fully offset the projected revenue loss.

Strong Market Position:

TMCH boasts the largest mobile market share in terms of the number of subscribers, with a 39% share as of March 2015, estimated by Subtel. The company is also equally well positioned in the 3G/4G mobile Internet segment, which has a high growth potential, with around 40% market share. The competitive landscape will remain intense as other major mobile operators, mainly ENTEL and Claro, will aggressively compete for high-end data users. Nevertheless, Fitch expects TMCH's market position to remain intact as its solid network infrastructure and service quality, and strong brand recognition will help fend off competitive pressures.

Stable Financial Profile:

TMCH's financial profile is forecast to remain commensurate with the rating level over the medium term backed by solid cash flow generation. The company's cash flow from operations (CFFO), estimated to remain well above CLP200 billion, will fully cover its average annual capex budget of CLP150 billion in 2015 and 2016. This will allow comfortable room for its dividend payments, as well as liquidity and debt service management. Fitch forecasts the company's net leverage, measured in terms of total adjusted net debt-to-EBITDAR, to remain at around 1.0x in the short to medium term, which is considered moderately low for the rating category. During the latest 12 months (LTM) as of June 30, 2015, TMCH's net leverage was 0.9x, reflecting its net value of hedge derivative instruments, which was a modest improvement from the end-2014 level of 1.2x.

KEY ASSUMPTIONS

--TMCH to resume its revenue growth in the low single digits in 2015 and 2016, following a contraction of 5% in 2014;

--EBITDAR margin to remain stable at around 26%-27% in 2015 and 2016;

--Free cash flow (FCF) to turn positive from 2016 and onwards in the absence of any sizable dividends;

--Capex-to-sales ratio to gradually fall below 15% over the medium term;

--Net leverage to remain stable at around 1.0x over the medium term.

RATING SENSITIVITIES

Negative rating action could be considered in case of material deterioration in the company's key operating and financial metrics due to intense competition, unfavourable regulatory impact, and higher than expected capex and shareholder distributions - all of which combined resulting in negative FCF generation and net leverage increasing to over 2x on a sustained basis

Telefonica Moviles Chile S.A.'s ratings are not directly linked to the ratings of its parent, TEF. However, any significant deterioration in the parent's credit profile, to the effect that it results in multi-notch rating downgrades or in a material liquidity crunch for the parent, could place pressure on Telefonica Moviles Chile S.A.'s ratings. TEF is currently rated 'BBB+'/Outlook Stable.

Conversely, an upgrade of Telefonica Moviles Chile S.A.'s ratings to a higher rating level than its parent's rating would be limited given their strong linkages.

LIQUIDITY

TMCH boasts a sound liquidity profile backed by its large readily available cash position amid robust CFFO generation. As of June 30, 2015, the company's short-term debt amounted to CLP192 billion, which was largely covered by its cash balance of CLP189 billion. The company has already successfully issued local notes in July and August 2015 in the amount of CLP100 billion to cope with the short-term debt obligation, mainly its USD300 million notes due in November 2015. The company's good access to capital markets further bolsters its financial flexibility and liquidity profile.

Full List of Rating Actions

Fitch affirms TMCH's ratings as follows:

--Foreign and local currency Issuer Default Rating (IDR) at 'BBB+';

--USD300 million senior notes due 2015 at 'BBB+';

--National long-term rating at 'AA(cl)';

--Local debt issuance programme series No. 589, No. 590, No. 813, and No.814 and series C, D, F, G, H and I bond issuances at 'AA(cl)'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990576

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990576

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings, Media Relations
Alyssa Castelli, New York
Tel: +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
or
Alvin Lim, CFA
Director
+1-312-368-3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Francisco Mercadal
Associate Director
+1-56-2-2499-3340
or
Committee Chairperson
Daniel R. Kastholm, CFA
Regional Group Head - Latin America
+1-312-368-2070

Contacts

Fitch Ratings, Media Relations
Alyssa Castelli, New York
Tel: +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
or
Alvin Lim, CFA
Director
+1-312-368-3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Francisco Mercadal
Associate Director
+1-56-2-2499-3340
or
Committee Chairperson
Daniel R. Kastholm, CFA
Regional Group Head - Latin America
+1-312-368-2070