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

CHICAGO--()--Fitch Ratings has affirmed Telefonica Chile S.A.'s (TCH) ratings as follows:

--Local Currency Issuer Default Rating (IDR) at 'BBB+';

--Foreign Currency IDR at 'BBB+';

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

--National scale short-term rating at 'N1+(cl)';

--USD500 million senior notes due 2022 at 'BBB+';

--Local debt issuance program No. 576 and the bond series F under the program at 'AA(cl)';

--Equity rating at level 4.

Fitch has also assigned 'AA(cl)' to the company's debt issuance program No. 577, as well as to its local bond series Q and R under the program.

The Rating Outlook is Stable.

TCH's ratings reflect its entrenched leading position in the Chilean fixed-line telecommunications market, strong brand recognition and network infrastructure, 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 another Chilean subsidiary Telefonica Moviles Chile S.A. (TMCH), also rated 'BBB+' by Fitch. TMCH offers complementary mobile telecommunication services and allows TCH to achieve synergies mainly in terms of costs and investments savings, brand unity, as well as sales coverage. The ratings are tempered by the intense competitive landscape, mature industry condition, and the company's shareholder distribution policy.

The ratings take into account ownership by TEF, rated 'BBB+' with a Negative Outlook by Fitch. In the event that Fitch were to downgrade TEF by one notch, the agency believes that TCH's ratings can remain at 'BBB+' provided TCH keeps its financial policies unchanged and TEF's liquidity position remains manageable. However, multiple-notch downgrades of TEF are likely to drag TCH's ratings down.

Slow Revenue Growth

Strong subscriber growth in the broadband and pay-TV services will be the key growth driver over the medium to long term as the penetrations of those services increase and help largely mitigate revenue losses in the traditional voice services. The growth in these services will enable the company to provide more attractive bundled products, which should also help preventing the churn of the voice customers and protecting the operating margins. The broadband and pay-TV segments remains relatively under-penetrated compared to the mobile industry as the penetration rates remain below 50% for both services. Fitch forecasts TCH's revenues to resume growth in the low single digits from 2015, while the EBITDA margin remains relatively stable comfortably above 35%. In 2013, TCH's sales contracted by 1% while EBITDA margins were solid at 38%.

In 2014, revenue contraction is likely to continue mainly due to the negative regulatory impact on the reduced fixed access charges and the elimination of the domestic long distance charges. Also, a continued fall in the subscriber base as well as falling ARPU would weaken the revenue contribution from the fixed-voice segment, which accounted for 42% of the total sales in 2013.

Higher Capex Limits FCF:

High capital expenditures should limit free cash flow (FCF) in the short to medium term. Investments should be over CLP200 billion for the next few years, and be mainly focused on the network upgrades for its broadband and Pay-TV services. Despite some pressures on the cash flow generation, Fitch believes that these investments are crucial for the company's long-term growth strategy which has increasingly become centered on non-voice services, including bundled products, as it plans to offer higher data transmission speed via fiber and to offer pay-TV services through IPTV. Given the high investment requirement, shareholder distribution is likely to be modest in 2014 and 2015.

Sound Financial Profile:

Fitch's base case projection indicates that TCH's net leverage ratio, measured by total adjusted net debt to EBITDAR, is likely to comfortably remain commensurate with its current rating level over the medium term. In 2014 and 2015, the ratio is likely to remain at around 1.2-1.3x which is in line with the end-2013 level of 1.2x (1.1x reflecting the fully hedged foreign currency exposure of its debt through derivatives) as negative FCF generations will be marginal. The company's capex may increase over the medium term from 2016 to further strengthen its network coverage/capacity, however, the leverage should remain solid at around 1.5x in the long term given its stable cash flow from operations. The company's financial policy with regards to the use of cash flow generation has historically been focused on maintaining a conservative financial profile amid necessary capital investments and shareholder distributions.

During the last 12 months ended June 30, 2014, the company's free cash flow (FCF) generation was marginally positive, CLP2.9 billion after the high capex of CLP 223 billion and dividends of CLP 13.7 billion. The total net debt increased to CLP348 billion from CLP305 billion at end-2013. The net leverage ratio stood at 1.3x (1.2x reflecting the hedge), a modest increase from 1.2x (1.1x reflecting the hedge) during the same period.

Equity Rating:

The equity rating for shares Series A and B of TCH was affirmed at Level 4(cl), based on the low level of free float and market presence, due to the majority stake ownership by TEF, which is offset by its solid solvency condition and long history in the stock market.

RATING SENSITIVITIES

Considerations that could lead to a negative rating action include:

--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;

--Resulting negative FCF generation and net leverage increasing over 2.0x on a sustained basis.

TCH'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 ratings downgrades or in a material liquidity crunch of the parent, could place pressures on TCH's ratings.

Although the ratings of TCH and Telefonica are not directly linked, an upgrade of TCH's ratings remains limited at this time due to Telefonica's current IDR of 'BBB+' with a Negative Outlook.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', May 28, 2014;

--'Short-term Ratings Criteria for Non-financial Corporates', Aug. 5, 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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Short-Term Ratings Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415

National Scale Ratings Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=869394

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Contacts

Fitch Ratings
Primary Analyst:
Alvin Lim, CFA, +1-312-368-3114
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Francisco Mercadal, +1-56 2 2499 3340
Associate Director
or
Committee Chairperson
Sergio Rodriguez, CFA, +1-52-81 8399 9100
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Alvin Lim, CFA, +1-312-368-3114
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Francisco Mercadal, +1-56 2 2499 3340
Associate Director
or
Committee Chairperson
Sergio Rodriguez, CFA, +1-52-81 8399 9100
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com