OREANDA-NEWS. Fitch Ratings has affirmed the long-term foreign currency and local currency Issuer Default Ratings (IDRs) of Comcel Trust (Comcel) at 'BB+' with a Stable Outlook. Fitch has also affirmed Comcel's USD800 million senior unsecured debt at 'BB+.'

Comcel Trust (Comcel) is a special-purpose vehicle (SPV) created in Cayman Island to issue USD 800 million senior unsecured notes on behalf of Comcel Group (Comcel), a group of several legal entities providing primarily mobile telecommunication services under the Tigo brand. The ratings of the trust are based on the combined credit profile of Comcel, which entities joint and severally guarantee the note on a senior unsecured basis.

KEY RATING DRIVERS

Leading Market Position

Comcel is 55% owned by Millicom International Cellular S.A (MIC; rated 'BB+' with a Stable Outlook). It is the largest mobile service provider in Guatemala, with a 52.8% of subscriber market share as of Sept. 30, 2014. As the first mobile service operator in Guatemala since 1990, the company has established an entrenched market position backed by its extensive network and distribution coverage, stable quality of service, as well as strong brand recognition of the 'Tigo' name. In addition, the company's customized promotion strategy, especially for high-end subscribers, has enabled its EBITDA market share to account for about 64% of the industry, well above its subscriber market share. Fitch believes that Comcel's competitive advantage, partly supported by MIC's industry expertise, will remain intact and help ward off price-driven competition from its peers to a certain extent over the medium to long term.

Slow Mobile Revenue Growth

Fitch forecasts that Comcel's top-line growth could be slow, in the low- to mid-single digits over the medium term, given the maturity of the Guatemalan mobile industry with about 125% penetration rates. Fitch believes that the continued decline in traditional voice revenues will be somewhat offset by the positive impact from increasing data revenues, which are being driven by higher smartphone usage and data plan adoption rates, estimated to be about 35% and 44% at the end of 2014, respectively. During 2014, the company has generated well over 90% of total sales from the mobile services.

Positively, revenue contribution from Tigo Home segment, mainly fixed broadband and cable TV, is likely to undergo strong double digits revenue growth over the medium term given Comcel's increasing network coverage expansion and bundling strategy. The segment remains relatively underpenetrated and highly fragmented which should provide Comcel with ample room to pursue both organic and inorganic growth. Fitch expects Tigo Home revenue proportion out of the total sales to increase to above 5% over the medium term, from about 2.5% in 2014.

Margins Falling but Still Strong

Comcel boasts one of the highest operating margins among the telecom operators in the region with its EBITDA margin of 51.3% in the LTM ended Sept. 30, 2014. Fitch forecasts the company's EBITDA margin to trend down toward 45% over the long term due to persistent high levels of competition, as well as unfavorable revenue mix change with an increasing contribution from lower margin fixed-line and equipment sales. Despite the decline, Fitch acknowledges that the forecasted EBITDA margin, in the range of 45%-50% during 2015-2017, still compares favorably to its regional peers.

Moderately Low Leverage

Fitch expects Comcel to maintain moderately low financial leverage for the rating category, with its net debt to EBITDAR forecast to be at around 1.5x over the medium term, backed by solid operational cash generation. The company's net leverage increased to 1.4x as of Sept. 30, 2014 from 0.9x at end-2013 mainly due to its high shareholder returns, including shareholder loan and dividends, which amounted to USD588 million during the first nine months of 2014 compared to just USD155 million from a year ago.

Fitch does not foresee any material improvement in the company's financial profile due to the aggressive shareholder return policy in the medium term. Despite solid cash flow from operations (CFFO), estimated to be above USD500 million which fully covers annual capex of about USD200 million, dividend payments could continue to pressure Comcel's FCF generation.

Benign Regulatory Environment

The Guatemalan telecom industry has limited regulation, as evidenced by the absence of material intervention in market competition, and/or asymmetrical regulation imposed by the regulatory body. Tariff policies are not subject to the regulatory review, and the interconnection rates are set by private contracts, all of which benefit the incumbent operator. In addition, there is no regulation on number portability. Fitch sees no indication of an adverse change in the regulatory stance that could materially affect operational landscape of Comcel in the near term given the high level of competition, quality of service, and consumer affordability. In such an environment, the company should be able to continue to develop business strategies utilizing its largest-scale benefit to maintain its market position.

Limited Geographical Diversification

Comcel's credit profile is tempered by its lack of geographical diversification. The company operates only in Guatemala and is significantly exposed to overall macroeconomic and political conditions of the country; GDP per capita was estimated to be USD3,700 in 2013. Although the company generates over 20% of its total revenue in USD primarily through international roaming/interconnection fees and calling cards, this revenue portion is also based on the operation in Guatemala. In Fitch's view, the company has limited room for growth and its scale of cash generation will remain relatively small compared to regional and global peers.

RATING SENSITIVITIES

Negative rating action could be considered in the case of an increase in net debt-to-EBITDAR above 2.5x without a clear path to deleveraging due to any one or combination of the following: deterioration in MIC's financial profile leading to more aggressive shareholder distributions, weaker cash generation due to competitive or regulatory pressures on its operations, and M&A activity.

Comcel's ratings are capped by the country ceiling of Guatemala. Therefore, a negative rating action on Guatemala's country ceiling would also pressure the ratings.