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

CHICAGO--()--Fitch Ratings has affirmed the following ratings for Telefonica Moviles Chile S.A. (TMCH):

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

--Foreign currency IDR at 'BBB+';

--US$300 million senior notes due 2015 at 'BBB+';

--National scale at 'AA(cl)';

--Local debt issuance programme series No. 589 and No. 590, and series C and D local bond issuances at 'AA(cl)'.

Fitch has also assigned an 'AA(cl)' rating to the company's series F local bond issuance.

The Rating Outlook is Stable.

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. The ratings are tempered by the intense competitive landscape, mature industry, and the company's shareholder distribution policy.

The ratings take into account ownership by TEF, which is rated 'BBB+' with a Negative Outlook. In the event that Fitch were to downgrade TEF by one notch, the agency believes that TMCH'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.

Mobile Internet Driving Long-Term Growth:

Strong growth in mobile Internet and data services should be able to fully mitigate subdued traditional voice service growth, which has been tempered by the maturity of the industry as well as some negative impact from the reduction in access charges during 2014. TMCH's mobile Internet subscriber base has been rapidly expanding at the CAGR of 29% during 2011-2013 which contributed to growth in the proportion of mobile Internet revenues out of the company's total sales to 14% from 10% during 2011-2013. Fitch projects the data-user numbers to grow by over 20% per year over the medium term and the revenue contribution to account for well over 20% by 2015. This growth should enable low- to mid-single-digit revenue growth over the medium- to long-term despite competitive/regulatory pressures on the voice service.

Pressure on Voice Continues:

The voice service revenue contraction is likely to continue over the medium term as the ARPU will keep trending down against the backdrop of high competition and the mature industry. As of March 2014, the penetration rate of mobile services in Chile rose to near 135%, which is among the highest in the region. In addition, interconnection rates for all mobile operators were cut by 75% from January 2014; the negative impact estimated by Fitch is about 10% of the company's 2013 revenues. However, this should not have a material impact on the company's cash flow or EBITDA as the interconnection fees paid to other operators by the company should be roughly similar to the projected revenue loss, and should make up for the loss.

Strong Market Position

TMCH has the largest mobile market share in terms of the number of subscribers, with 39.5% of market share at the end of March 2014, estimated by Subtel. Also, the company is well positioned in the 3G mobile Internet segment, which has a high growth potential, with a 42.7% market share as of March 2014, slightly higher than its overall market share. Although the competitive pressures will remain intense, Fitch believes that the company's aggressive investments for network upgrades in addition to the strong brand recognition will enable it to protect its market position over the medium term. Main competitive threats will continue to stem from other large operators such as Entel and Claro, as smaller players, including MVNOs, have yet to account for any meaningful market shares.

Solid Pre-dividend FCF; Stable Financial Profile:

Fitch forecasts the company's net leverage, measured in terms of total adjusted net debt-to-EBITDAR, to remain commensurate with the current rating level at around 1.1x in the short- to medium-term, which is largely in line with the 2013 level of 1.0x. TMCH's cash from operations (CFO) is expected to fully cover the company's average annual capex budget of CLP150 billion in the next couple of years. The positive pre-dividend free cash flow (FCF) should allow comfortable room for modest shareholder distribution as well as liquidity and debt service management. For the 12 months ended June 30, 2014, leverage measured as total adjusted debt-to-EBITDAR and total net debt-to-EBITDAR stood at 2.1x and 1.10.9x, respectively (1.9x and 0.7x reflecting the fully hedged foreign currency exposure of its debt through derivatives).

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 - all of which combined resulting in negative FCF generation and net leverage increasing over 2x on a sustained basis.

TMCH'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 TCH's ratings.

Although the ratings of TMCH and Telefonica are not directly linked, an upgrade of TMCH'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:

National Scale Ratings Criteria

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

Short-Term Ratings Criteria for Non-Financial Corporates

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

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=869395

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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
Francisco Mercadal
Associate Director
+1-56 2 2499 3340
or
Committee Chairperson
Sergio Rodriguez, CFA
Senior Director
+1-52-81 8399 9100
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
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
Francisco Mercadal
Associate Director
+1-56 2 2499 3340
or
Committee Chairperson
Sergio Rodriguez, CFA
Senior Director
+1-52-81 8399 9100
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com