Fitch Affirms Colombia Telecomunicaciones S.A. E.S.P.'s Ratings at 'BB'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Colombia Telecomunicaciones S.A. E.S.P.'s (Coltel) foreign and local currency Issuer Default Ratings (IDRs) and the company's USD750 million senior notes due 2022 at 'BB'. The Outlook on the IDRs is Stable.
KEY RATING DRIVERS
Coltel's ratings reflect its enhanced competitive position from the merger of the fixed and mobile operations in 2012 which resulted in the nation-wide coverage of its services and diversified portfolio. The ratings also positively reflect the reduced payment obligation to Patrimonio Autonomo de Activos y Pasivos de Telecom (Parapat), from which the company leases fixed operating assets, and increased financial flexibility through the restructuring of the terms of the operating contract in 2012. Implied support from the parent, Telefonica SA (rated 'BBB+' by Fitch), which owns 70% of the company, is also incorporated in the ratings given its strategic/operational importance to the parent's Latin America operation.
The ratings are tempered by a persistent high level of competition, the projected weak cash generation in the short- to medium-term due to high capex for network upgrades, and its weak liquidity profile. Also, the existing Parapat-related obligation continues to pressure the company's cash flows and adjusted leverage. This liability will start being recognized on the balance sheet with the adoption of the new accounting standard from 2015.
Improved Competitive Position
Coltel's competitive position has strengthened from the integration of fixed and mobile operations in 2012. The combined company benefits from nationwide coverage, increased operational scale and revenue diversification, as well as cost savings from the infrastructure sharing, IT systems integration, and use of fixed network transmission capacity to support higher demand for mobile services. The company is the second largest mobile operator in Colombia, with a market share of 24%, and the third largest fixed-line operator, with 20.6% and 18.9% of fixed voice and broadband market shares, respectively. Coltel has focused on improving revenue contributions from its mobile data and value added services (VAS), along with Pay-TV and broadband access, to help mitigate the slowdown in the traditional voice ARPU. Revenue generation from the company's mobile data, broadband, and Pay-TV grew by 31%, 12%, and 38%, respectively, during the first half of 2014 from a year ago.
High Capex; Negative Free Cash Flow (FCF)
The company has embarked on a sizable capital expenditure program from 2014 for its mobile/fixed network upgrades, mainly including 4G, as well as the license payments. Coltel expects to invest a total of COP3.500 billion during 2014-2017, which should be partially funded by debt initially in 2014 and 2015 as its cash flow from operations (CFFO) is expected to cover about 90% of investments during the period. Fitch expects the company's FCF to turn positive from 2016 as capex and working capital requirements gradually decline. Given the plans for significant investment, shareholder distributions are not likely during 2014-2017.
Meanwhile, Coltel's EBITDA generation is likely to modestly decline in 2014 from the 2013 level of COP1.291 billion mainly due to the scheduled increase in payments to Parapat amid the decreasing trend in ARPU as a result of competitive pressures. The Parapat payments will account for approximately 7% of revenues in 2014 and 10% from 2015 thereafter, which is an increase from 3% in 2013. In addition, the merger between Tigo and UNE could add more pressure to the competitive landscape. As a result, Coltel's EBITDA is projected to gradually fall well below 30% over the medium term from 31% in 2013.
Short-term Increase in Leverage
Coltel's financial leverage is likely to increase in 2014 and 2015 given its high capex plan and weak EBITDA growth. Fitch's base case indicates that its net debt-to-EBITDA ratio would remain around 3x in the short- to medium-term, which compares to 2.6x at end-2013 and 2.8x at the LTM ended June 30, 2014. This ratio should start improving from 2016 as FCF turns positive.
Fitch considers Coltel's liability to Parapat under the new restructuring conditions as a softer debt for a leverage analysis purpose given the potential flexibility in payments under the stress scenario. Reflecting the present value of this commitment, including rental payments for infrastructure, the company's adjusted debt-to-EBITDAR ratio would have reached 4.5x at end-2013, and could increase to above 5x from 2014. Parapat is a long-term financial obligation ending in 2028.
Coltel's liquidity position is weak as it has increased its short-term debt to fund its capex and the licenses payment obligations. This, along with current debt maturities, resulted in the short-term debt level reaching COP705 billion, compared to its cash balance of COP51 billion as of June 30, 2014. Fitch believes that the company should be able to roll over its short-term debt with its available credit facilities, which amount to COP1.000 billion with local and international banks, while some portion could be paid off with the CFFO as they mature. As of June 2014, the cash plus CFFO-to-short-term debt ratio was 1.6x.
Factors that could trigger a negative rating action include:
-- Increased competitive pressures leading to erosion in its market positions and operating margins;
-- Higher-than-expected capex leading to weak cash generation over the medium- to long-term, resulting in its on-balance-sheet net leverage (calculated under Colombian GAAP) failing to recover to below 3x on a sustained basis. In addition, failure to improve its liquidity could pressure the ratings.
Credit quality factors that could lead to a positive rating action include:
-- Positive rating action is unlikely in the short- to medium-term given the expected increase in leverage due to high capex. Factors that could potentially lead to a positive rating action include positive FCF generation which enables a reduction in leverage towards 2x on a sustained basis.
Additional information is available '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