CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed America Movil, S.A.B. de C.V.'s (AMX) and Telefonos de Mexico, S.A.B. de C.V.'s (Telmex) Local and Foreign Currency Long-Term Issuer Default Ratings (IDRs) and senior unsecured notes at 'A'. Fitch has also affirmed AMX's and Telmex Internacional S.A.B. de C.V. y Subsidiarias' (Telint) national scale ratings at 'AAA(mex)'. The Rating Outlook on the IDRs is revised to Negative from Stable. A full list of rating actions follows at the end of this release.
The Outlook revision to Negative reflects AMX's continued EBITDA erosion, caused by increasing competitive pressures in its key Mexico market, and resultant financial profile deterioration that is not deemed in line with its 'A' rating level. While any material EBITDA recovery would prove challenging in the short to medium term due to a tough operational outlook, the company's commitment to free cash flow (FCF) turnaround and leverage improvement with measured shareholder distributions amid lower capex requirement will be critical for a future rating action. Ratings will be downgraded in case of a lack of indication for its net leverage to recover to below 2.0x over the medium to long term.
AMX's ratings reflect its strong market position as the largest wireless service provider in Latin America with well-established multiple service platforms and solid network competitiveness, as well as a high degree of geographical cash flow diversification. The company boasts relatively stable and robust operational cash flow generation, which also enables ample financial flexibility and solid liquidity. Negatively, ratings are tempered by high competitive and regulatory pressures in some of its key markets, recent increase in leverage, and mature market conditions negatively pressuring prices.
KEY RATING DRIVERS
Pressures in Mexico:
AMX's suppressed EBITDA generation in its main Mexican market is unlikely to be curbed in the short to medium term due to high competitive pressures. The company has been subject to unfavorable reform measures since 2014, while the entrance of AT&T has also ignited intense price-based competition, leading to rapid ARPU erosion of 18% in 2Q16 compared to the level of 2Q15. AMX's EBITDA in Mexico deteriorated by 20% during the first half of 2016, compared to the same period a year ago.
Fitch does not expect the competitive intensity to ease in the short to medium term given its competitor's high investment plans to improve market positions. As such, any meaningful margin recovery in its key Mexican market is expected to be limited, with its EBITDA margin remaining well below 35% over the medium term, compared to the 2015 level of 40%.
AMX's financial profile is deemed weak for the rating level and its failure to restore net leverage toward 2.0x over the medium term will result in a ratings downgrade. The company's leverage has continued to increase in recent years, mainly due to negative FX movement and high shareholder distributions amid pressured EBITDA growth, with its net debt to EBITDA reaching 2.5x at end-June 2016, from 2.2x at end-2015 and 1.9x at end-2014. Including the off-balance sheet debt adjustment for its spin-off and leasing back of the tower assets, the adjusted net leverage further increased to 2.6x at end-June 2016. In Fitch's leverage calculation, the fair value of the company's equity stake in Koninklijke KPN B.V. (KPN), which amounted to MXN46 billion as of June 30, 2016, is not included.
Robust Cash Flow Generation:
Positively, AMX boasts strong operational cash flow generation and Fitch forecasts its pre-dividend FCF generation to turn positive in 2016 and onwards, which could be used for deleveraging. The company's capex budget is likely to be gradually tapered following its aggressive investments since 2011 as major investments for network upgrades are largely completed. As a result, Fitch expects its capex to fall by 20-25% in 2016 from the USD10 billion levels seen in the past five years, with the capital intensity ratio declining to below 15% over the medium term from 17% in 2015. Fitch forecasts the company's pre-dividend FCF margin to remain at around 5% over the medium term.
Given the company's steady cash flow generating ability, AMX's commitment to achieve any meaningful deleveraging will largely hinge on its shareholder return policy or acquisitions plans. In the absence of any sizable dividends and share buyback, or debt-funded acquisitions, Fitch forecasts the company to generate sufficient FCF to achieve a gradual deleveraging to 2.0x over the long term.
Slow Growth; Margin Erosion:
AMX's service revenue growth will remain slow but stable over the medium term backed by the growth in its subscriber base and data revenues which help offset the increasing pricing pressures on voice services. The company has aggressively invested since 2011 in upgrading its fixed/mobile networks across the region to provide attractive bundled fixed product offerings, as well as to improve mobile data user base and revenues. As a result, the revenue contributions from fixed-line data services, including pay-TV, and wireless data represented 25% and 31% of the consolidated revenues, respectively, during 2Q16, which are significant improvements from 20% and 21%, respectively, in 2012. AMX has managed to improve its service revenues by 2% during 1H16 compared to the same period a year ago.
Negatively, ongoing margin erosion is unlikely to reverse given pressured EBITDA generation from its key Mexican operation, which accounted for 36% of the consolidated EBITDA during 1H16. Also, the competitive landscape and economic conditions remain tough in its key operational geographies which would make any material margin recovery difficult. AMX's consolidated EBITDA margin deteriorated to 27% during 1H16, which compares to 30% in 2015.
Fitch's key assumptions within the rating case for America Movil include
--Low-to-mid single digits revenue growth over the medium term;
--EBITDA margin to be around 27% over the medium term;
--Annual capex to be around USD7.5 billion in 2016 and 2017;
--Average pre-dividend FCF margin estimated to be about 5% over the medium term;
--Net leverage to gradually recover to 2.0x by 2018 absent large shareholder distributions.
Future developments that may, individually or collectively, lead to a negative rating action include:
AMX's current leverage level is high for the rating level. Ratings will be downgraded in case of any further increase in its net leverage, or its failure to gradually improve the ratio, measured by its adjusted net debt to EBITDAR, to below 2.0x over the medium to long term due to:
--Increased regulatory and competitive pressures across AMX's operational geographies leading to significant erosion in its market positions and operating margins;
--Aggressive shareholder return policy in terms of both dividends and share buybacks;
--Sizable investments/acquisitions leading to weak cash generation over the medium to long term.
Conversely, the Rating Outlook will be revised back to Stable if the company successfully returns to positive FCF generation post shareholder return, including share buyback, and continues to reduce its net debt to improve its net leverage to below 2.0x.
AMX has strong liquidity backed by robust internal cash flow generation and good access to domestic/international capital markets when in need of external financing, which supports its financial flexibility. The company held a readily available cash balance of MXN60 billion at end-June 2016, excluding the fair value of its stake in KPN which amounted to MXN46 billion, against the short-term debt of MXN106 billion. The company also has two undrawn revolving syndicated facilities, of which the total amount is USD4.6 billion. Telekom Austria also has an undrawn revolving syndicated facility of EUR1 billion.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
America Movil S.A.B de C.V.
--Local Currency Long-Term IDR at 'A';
--Foreign Currency Long-Term IDR at 'A';
--Senior unsecured notes issuances at 'A';
--Subordinated notes issuances at 'BBB+';
--Mexican national scale rating at 'AAA(mex)';
--Certificados Bursatiles issuances at 'AAA(mex)';
--UF30 million Chilean Notes Program N#474, including Series D issuance, at 'AA+(cl)'.
The Outlook on the IDR is revised to Negative from Stable. The Outlook on the Mexican national scale ratings remains Stable.
Telefonos de Mexico S.A.B. de C.V.
--Local currency Long-Term IDR at 'A';
--Foreign currency Long-Term IDR at 'A';
--Senior notes issuances at 'A'.
The Outlook on the IDR is revised to Negative from Stable.
Telmex Internacional S.A.B. de C.V. y Subsidiarias
--Mexican national scale rating at 'AAA(mex)';
--Mexican national scale short term rating at 'F1+(mex)'.
The Outlook on the national scale ratings remains Stable.
America Movil B.V.
--EUR750 million exchangeable notes at 'A'.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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