Fitch Affirms Telefonica Chile at 'BBB+'; Outlook Stable
KEY RATING DRIVERS
TCH's ratings reflect its entrenched leading position in the Chilean fixed-line telecommunications market, strong brand recognition and network infrastructure, and sound financial profile backed by solid operational cash flow generation. The ratings also incorporate its linkage to the parent, Telefonica S. A. (TEF) rated 'BBB', and TEF's other Chilean subsidiary Telefonica Moviles Chile S. A. (TMCH), also rated 'BBB+'. TMCH offers complementary mobile telecommunication services and allows TCH to achieve synergies mainly in terms of integrated business strategy under the common management, , brand unity, as well as sales coverage. The ratings are tempered by the intense competitive landscape, mobile-fixed substitution which has rapidly eroded fixed-voice service revenues, and the company's shareholder distribution policy.
Strong market position:
TCH is the largest fixed-line service provider in Chile and Fitch expects its strong market position to remain intact over the medium term backed by the company's continued high investments, especially in fiber, to maintain its network competitiveness. As of March 2016, the company's revenue-generating units amounted to 3.1 million, estimated by Subsecretaria de Telecomunicaciones (Subtel), which was relatively unchanged compared to a year ago as continued fixed-voice customer loss was compensated for by steady increase in broadband and pay-TV subscribers. TCH retained leading market share of 43% in the fixed-voice segment, and the second-largest market shares of 37% and 21% in broadband and pay-TV, respectively, behind VTR Globalcom S. A. during the same time period.
Stable Operational Outlook:
TCH's steady subscriber growth in broadband and pay-TV operations will continue to support stable performance in the short - to medium term despite ongoing contraction in traditional voice service revenues. Service penetrations of broadband and pay-TV, which are estimated to be just over 50% each, indicate further growth headroom over the medium term. In addition, these services enable the company to provide attractive bundled products, which also helps prevent the churn of the voice customers and protects profitability.
Fitch forecasts stable revenue growth will continue over the medium term, albeit at a slow pace of low-single-digits due to voice revenue erosion. During first-half 1016 (1H16), TCH managed to grow its revenues by 6%, backed by 8% and 4% growth from broadband and pay-TV segments, respectively, without any material regulatory access charges adjustment. The company's revenue has continued to diversify away from voice, of which, the revenue proportion (including the long distance segment), of the total sales has fallen to about 34% during 1H16 from 47% in 2012, and Fitch forecasts this will fall further, to below 30% by 2018. TCH's EBITDA margin remained stable at 34% during 1H16, in line with the 2015 level.
High Capex; Neutral FCF
Fitch believes TCH's FCF generation will remain limited in 2016 and 2017, mainly due to continued high capex, while dividends are expected to remain modest. Fitch expects the company's annual capex budget to hover at around CLP170 million-CLP180 billion in 2016 and 2017, mainly to improve broadband and pay-TV competitiveness, which will consume most of its cash flow from operations (CFFO) during the period. Fitch believes that these investments are crucial for the company's long-term growth strategy which has increasingly become centered on network quality to support its non-voice segment.
Sound Financial Profile:
TCH's financial profile should remain commensurate with the current rating level over the medium term. Fitch forecasts net leverage, measured by total adjusted net debt/EBITDAR, to remain stable at around 1.1x in 2016 and 2017, relatively unchanged from 1.0x at end-2015, in the absence of any sizable shareholder distributions amid muted EBITDA growth. This level of leverage is considered low for the rating category.
The equity rating for series A and B shares of TCH was affirmed at Level 4(cl), given the low level of free float and market presence due to the majority stake ownership by TEF. This is mitigated by its solid solvency condition and long history in the stock market.
Fitch's key assumptions within the rating case for TCH include
--Low-single-digit revenue growth in 2016 and 2017;
--EBITDAR margin in the range of 33%-34% in 2016 and 2017;
--Capex to remain in the range of 23%-24% in 2016 and 2017, in line with the 2015 level of 24%.
--Neutral-to-negative FCF generation over the medium term based on the assumption of CLP10 billion in annual dividend payments;
--Net leverage to remain relatively stable at around 1.1x over the medium term.
Negative rating action could be considered in case of material deterioration in the company's key operating and financial metrics due to intense competition, unfavorable regulatory impact, and higher than expected capex and shareholder distributions - all of which combine, resulting in negative FCF generation and net leverage increasing to over 2x on a sustained basis.
Telefonica Chile S. A.'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 further rating downgrades or in a material liquidity crunch for the parent, could place pressure on Telefonica Chile S. A.'s ratings. TEF is currently rated 'BBB'/Outlook Stable.
Conversely, an upgrade of Telefonica Chile S. A.'s ratings, resulting in more than one-notch differential from the parent's 'BBB' rating, would be limited given their strong linkages.
TCH's liquidity profile is sound backed by its readily-available-cash position, which amounted to CLP61 billion, which mostly covering its short-term debt maturities of CLP68 billion as of June 30, 2016, and its stable cash flow generation. The company's debt maturities are well spread and it does not face any significant bullet maturity until 2022 when its USD500 million (equivalent to about CLP315 billion) notes become due. TCH has good access to capital markets, which further bolsters its strong liquidity position.
Fitch affirms TCH's ratings as follows:
--Long-Term Foreign and Local Currency IDRs at 'BBB+'/Outlook Stable;
--National long-term rating at 'AA(cl)'/Outlook Stable;
--National short-term rating at 'N1+(cl)';
--Senior unsecured USD500 million notes due 2022 at 'BBB+';
--Local debt issuance programme series No. 576 and No. 577 and series and Q and R local bond issuances at 'AA(cl)'.
-- --National Equity Rating at 'Primera Clase Nivel 4'.