MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB+(exp)' rating to Telefonica Chile S.A.'s proposed up to USD$500 million senior notes due 2022. Proceeds from the issuance will be used primarily to refinance upcoming maturities of 2013 and 2014 and to a lesser extent for working capital needs and capital expenditures.
Telefonica Chile's ratings reflect its leading position in the Chilean fixed telecommunications market, solid financial profile and strong operating cash flow generation. The ratings also incorporate a strong competitive environment, low regulatory risk, weaknesses in local traffic and the policy of returning cash to shareholders. Telefonica Chile's strong brand equity, leading position and operational experience should allow it to maintain a strong cash flow generation and financial profile with relatively stable leverage levels, despite competitive challenges.
Additionally, the ratings take into account ownership by Telefonica S.A. (TEF; rated 'BBB+' with a Negative Outlook by Fitch). In the event that Fitch downgrades TEF by one notch, Fitch believes that Telefonica Chile ratings can stay at 'BBB+' provided they keep its financial policies unchanged and TEF liquidity position remains manageable.
However future multiple notch downgrades of TEF are likely to pressure Telefonica Chile's ratings. The majority ownership by TEF, in Fitch's opinion, benefits Telefonica Chile in the form of operating efficiencies related to economies of scale, cost and administrative efficiencies between Telefonica Chile, Telefonica Moviles Chile S.A. (TMCH, rated 'BBB+' by Fitch) and its parent in Spain.
Fitch expects stable EBITDA during 2012. Revenue growth in future years from broadband and pay-tv should continue to compensate for revenue losses in traditional voice services resulting in stable EBITDA levels and margins. Steady revenues, cost efficiencies and expense savings may lead to minor improvements on EBITDA margins over the next few years.
High Capex Limits FCF:
High capital expenditures and dividend payment should limit FCF. However expectations on capex over the year ranging between CLP160 billion and CLP180 billion are lower than what Fitch anticipated over the past. Investments should be mainly focused on broadband, pay television services as well as network upgrades.
Telefonica Chile's strategy is centered in increasing broadband accesses, with bundle offerings that include voice and pay television services. This strategy contemplates increased investments to offer higher speeds and should mitigate declines in lines in service (LIS), control churn and increase loyalty within its customers.
Low Regulatory Risk:
Fitch believes the regulatory environment for Telefonica Chile has improved over the past few years. In January 2009, the antitrust authority liberalized fixed and variable charges for local services and public telephony. In addition the tariff decree for the 2009-2014 period continues to regulate the interconnection and local access charges. Telefonica Chile's regulated tariff services are approximately 10% of revenues, which favorably compares with 50% in 2004.
Number portability has not been material for Telefonica Chile since its introduction in December of 2011. This has resulted in a net balance on LIS ports to other companies of 19 thousand out of the 68 thousand LIS decline during the first half of 2012.
Revenues of fixed telecommunications declined 6% in first half-2012 vis-a-vis 2011. However, PAY-TV revenues increased 44% over the same period, which more than offset the revenue decline of fixed telecommunications. Telefonica Chile continues to face competitive challenges especially in traditional voice services. However the strategy of bundling services should mitigate this effect as approximately 70% of residential LIS are under bundled offerings.
Sound Financial Profile:
Telefonica Chile's ratings take into account the expectation that total debt to EBITDA ratio should remain at or below 2.0 times (x) over the long term, with positive free cash flow generation. Fitch views the policy of uses of cash flow generation is as most integral to maintaining a conservative financial profile, followed by making necessary investments and then returning the excess cash flow to shareholders.
Proforma the proposed issuance gross leverage will increase temporarily, until the proceeds are used primarily to pay indebtedness, and net leverage is expected to remain stable. For the 12 months ended June 30, 2012, FFO adjusted leverage was 1.4x and total debt to EBITDA was 1.3x. For this same period FFO net adjusted leverage and net debt to EBITDA both end up at 1.0x. Coverage ratios of FFO interest coverage and EBITDA to gross interest were 13.6x and 14.0x.
Fitch expects Telefonica Chile to pay with cash and marketable securities of CLP98 billion as of June 30, 2012 the maturity of CLP60 billion coming due in October of 2012. Fitch also expects Telefonica Chile will use the proceeds from the proposed senior notes to refinance in advance upcoming maturities of the next few years. Telefonica Chile indebtedness after considering hedges totaled CLP356 billion at the end of second quarter-2012.
Debt is primarily composed of CLP165 billion in syndicated loans, CLP210 billion in local bonds, CLP3 billion in capital leases and a gain of CLP22 billion in hedges of principal. All the debt is denominated in local currency after hedges and 42% has a floating interest rate. Fitch expects that as interest rates increases, Telefonica Chile should continue to increase the proportion of debt with fixed rates by using hedges.
Key Rating Drivers:
Factors that may precipitate a negative rating action or Outlook revision to Negative includes multiple notch downgrades of parent company Telefonica S.A. (rated 'BBB+' with a Negative Outlook). Another potential credit negative would be if Telefonica Chile's operating performance deteriorates rapidly due to competition, convergence of services or regulation that results in a sustained increase in leverage over 2.0x. Conversely, positive factors to credit quality includes reducing and maintaining a long term leverage of total debt to EBITDA of 1.0x or below, increase in FCF and broader service revenue diversification.
Fitch rates Telefonica Chile S.A. as follows:
--Local currency IDR at 'BBB+';
--Foreign currency IDR at 'BBB+';
--National scale long term rating at 'AA(cl)';
--National scale short-term rating at 'F1+(cl)';
--Local bonds series L, F, N and M at 'AA(cl)';
--Equity rating at 'level 4'.
The Rating Outlook is Stable
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Telecom Companies' (Aug. 9, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', Aug. 10, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates (Aug. 10, 2012).
Applicable Criteria and Related Research:
Rating Telecom Companies
Corporate Rating Methodology
National Ratings Criteria
Parent and Subsidiary Rating Linkage
Short-Term Ratings Criteria for Non-Financial Corporates
Sergio Rodriguez, CFA, +52-81-8399-9100
Fitch Mexico S.A. de C.V., Prol. Alfonso Reyes 2612, Monterrey, Mexico
Francisco Mercadal, +56-2-499-3340
Alberto Moreno, +52-81-8399-9100
Elizabeth Fogerty, New York, +1 212-908-0526
Source: Fitch Ratings