Fitch Rates Millicom's Proposed up to SEK2B Notes 'BB+(EXP)'

CHICAGO--()--Fitch Ratings expects to rate Millicom International Cellular, S.A. (MIC)'s proposed up to SEK 2 billion senior unsecured notes due 2019 'BB+(EXP)'. Proceeds from the issuance are expected to be used for general corporate purposes, including tender offers for its SEK2 billion outstanding notes due 2017.

MIC's ratings reflect the company's geographical diversification, strong brand recognition and network quality, all of which have contributed to its leading market positions in key markets, steady subscriber growth, and solid operational cash flow generation. In addition, the rapid uptake in subscribers' data usage, as well as MIC's ongoing expansion into 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's presence in countries in Latin America and Africa with low sovereign ratings. The ratings are also tempered by the recent increase in the company's financial leverage due to M&A activities, historically high shareholder returns, and debt allocation between subsidiaries and the holding company.

While operational fundamentals and key financial metrics are stable, the ongoing investigation regarding the improper payment on behalf of Tigo Guatemala is credit negative. The timeline or the magnitude of the potential impact stemming from this issue remains largely uncertain at this time. Fitch will closely monitor the situation and take immediate action, if necessary, when details become available.

KEY RATING DRIVERS

Leading Market Positions:

Fitch expects MIC to retain its market leadership position in its key cash-generating operating companies over the medium term backed by its extensive network quality, strong service quality and brand recognition. MIC has managed to retain its market leadership in most of its key cash-generating operating countries such as Guatemala, Paraguay, and Honduras by maintaining steady subscriber-base expansion. MIC mobile subscribers grew 11% by year-end 2015 compared to 2014. Additionally, the company's increasing investment into fixed-line operation will help acquire more revenue-generating units going forward.

Solid Performance:

MIC has continued to achieve a stable revenue and EBITDA improvement during the fourth quarter of 2015 (4Q15), driven by continued data subscriber expansion, solid growth in its fixed-line operation, and the improved cost structure. On a constant currency basis, the company has improved its revenues and EBITDA by about 6% and 5%, respectively, compared to a year ago. The EBITDA margin remained stable at 31% backed by the company's efforts to rein in marketing and by holding down corporate costs, which is a noticeable improvement compared to its consistent EBITDA margin erosion until 2014 due to competitive pressures. Excluding the one-off charges, including restructuring and integration costs mainly booked in Q415, the EBITDA margin was 33.7%, which favourably compares to the 2014 level of 33.0%.

Ongoing FX Headwind:

MIC's recent solid performance has been largely diluted by the ongoing local currency depreciation against the U.S. dollar, the reporting currency of the company. The largest impact among the key subsidiaries was seen in Colombia with 32% and Paraguay with 25%. Currency mismatch is also high for MIC with regard to its debt structure, as 70% of its total debt is denominated in USD while its cash flow generation is predominantly based in local currency.

Positively, we believe that this risk is manageable, as the company has stable cash flow generation without any sizable USD bond maturities until 2020, while its access to international capital markets have historically been solid. Also, MIC plans to increase the local-currency denominated debt proportion up to 40% within the next 24 months.

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 30% of total subscribers as of Dec. 31, 2015, from 20% as of end-2013, which supported 24% mobile data revenue growth during 2015, compared to a year ago. Broadband and pay-TV businesses also maintained solid growth, largely due to UNE EPM Telecomunicaciones S.A., as segmental revenues grew by 164% during the same period. As this trend continues, Fitch forecasts mobile service revenues will to continue to fall toward 60% of total revenues over the medium term, which compares to 83% in 2013.

Leverage to Improve:

Fitch forecasts MIC's leverage will gradually fall over the medium term as the company continues to refrain from aggressive shareholder payouts amidst EBITDA improvement and asset disposals, including the recently announced DRC operation. The company's dividend payment remained stable at USD264 million in 2015, in line with the 2014 level, which was a sharp reduction from USD731 million including share repurchases in 2012 and USD991 million in 2011. In addition, capex should remain relatively flat at around USD1.2-1.3 billion over the medium term, representing about 18% of revenues, which is a decline from 22.5% in 2013.

This should lead to neutral to modest positive free cash flow (FCF) generation and help the company reduce its leverage moderately over the medium term, barring any material financial impact from the ongoing legal investigation. On a proportionate consolidation basis, the net leverage ratio was 2.3x during the same period.

Concentration in Low-Rated Sovereigns:

Despite the diversification benefit, MIC's ratings are tempered by its operational footprint in countries in 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, tends to be more volatile than developed markets, which could have an adverse effect on MIC's operations. This also adds currency mismatch risk, as 70% of MIC's total debt was based in USDs while most of its cash flows are generated in local currencies in each country.

KEY ASSUMPTIONS

--Mid-single-digit annual revenue growth over the medium term;

--Cable & Digital Media segment to grow to well over 25% of consolidated revenues over the medium term, compared to 16% in 2013, largely due to UNE consolidation;

--EBITDA margin to remain stable in the short- to medium-term, reflecting the minority dividend payment;

--Annual capex to remain at about USD1.2-1.3 billion over the medium term in line with 2015;

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

RATING SENSITIVITIES

Negative rating action could be considered in case of an increase in net leverage toward 3.0x without a clear path to deleveraging due to any one or combination of the following: sustained negative free cash flow generation due to competitive/regulatory pressures amidst market maturity, sizable M&A activities, and aggressive shareholder distributions.

Also, any potential material financial impact from the ongoing investigation regarding the improper payment on behalf of its joint venture operation in Tigo Guatemala would pressure the ratings.

In Fitch's analysis of MIC's financial profile, the group's proportionately consolidated key financial metrics and the amount and the geographical breakdown of the upstream cash flow income from its subsidiaries will remain key considerations.

Positive rating action in the short- to medium-term is unlikely given the company's higher leverage level than in the past, its operational concentration in low-rated countries, and the ongoing investigation.

A positive rating action could be considered in the case of a material improvement in diversification of cash flow generation, mainly from investment-grade-rated countries, and stronger market positions and stable positive free cash flow generation leading to consistent recovery in its leverage.

LIQUIDITY

MIC's liquidity profile is good given its large cash position, which fully covered the short-term debt as well as its well-spread debt maturities with an average life of 5.8 years. As of Dec. 31, 2015, the consolidated group's readily available cash was USD937 million, which compares to its short-term debt of USD251 million, on a fully consolidated basis. 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 a USD500 million undrawn credit facility which further bolsters its liquidity. MIC also has a good track record in terms of its access to capital markets when in need of external financing, which supports its liquidity management.

Date of Relevant Rating Committee: Jan. 7, 2016

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

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002577

Endorsement Policy

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

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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 R. Kastholm, CFA
Regional Group Head - Latin America
+1-312-368-2070
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@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 R. Kastholm, CFA
Regional Group Head - Latin America
+1-312-368-2070
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com