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Fitch Affirms Telecom Argentina and Telecom Personal's IDRs; Outlook Stable

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Fitch Ratings has affirmed the ratings outlook for Telecom Argentina (TEO), and subsidiary mobile network, Personal as Stable. Fitch said that the affirmation of TEO and Personal's ratings reflects a sound credit profile, strong operating performance and manageable debt maturity profile over the medium term.

The ratings are tempered by increased competition, regulatory risk in the fixed-line business and currency mismatch between its foreign currency denominated debt and its peso denominated cash flow. The ratings incorporate the differences between controlling shareholders (Telecom Italia and Werthein Group at Sofora), and investigations by the government related to Telefonica's ownership in the controlling group of Telecom Italia should not affect the company's credit quality. In addition, the nationalized pension fund, ANSES, which owns approximately 23% of TEO's shares ensures that TEO's main strategy will remain unchanged. The foreign currency IDR of both companies is constrained by the country ceiling of Argentina at 'B'.

TEO benefits from a diversified business mix, with a mobile business unit providing a growth share of total revenues and EBITDA (approximately 65% of consolidated EBITDA). TEO's incumbent position in northern Argentina in fixed-line services and mobile services mitigates potential fixed-line traffic loss due to mobile substitution. Fitch believes fixed-mobile convergence can help integrated operators, such as TEO, to improve customer loyalty, reduce operating costs and avoid cannibalization between business segments.

TEO's EBITDA and cash flow has significantly improved over the past two years, driven primarily by its mobile business, despite facing some increases in operating costs as fixed-line rates remain frozen. With current economic conditions TEO is expected to continue posting modest revenue and EBITDA growth, driven by the mobile segment which is expected also to show slowing growth. Fitch expects that on a consolidated basis, TEO should continue generating free cash flow (FCF) (cash from operations minus capex) in excess of ARS1 billion per year, which should be used to continue paying debt. In addition, the company should start generating positive retained earnings during 2009, which would enable TEO to pay dividends in the future. Nevertheless the company will need to prepay debt in the amount of 2.5 times (x) the amount of dividend it intends to distribute under current debt covenants. Capex for 2009 should be in the range of ARS1.6 billion and should be allocated approximately 50% for the fixed business and 50% for the mobile segment.

TEO continues to invest in upgrading its fixed network to a next generation network, focusing its efforts on improving synergies in the offering of a full range of integrated fixed and wireless services. In addition it has entered into a commercial agreement with Direct TV to offer pay television services through a bundled offering. Investments for the fixed businesses should be oriented toward the expansion of ADSL services and the upgrade of the network in order to increase its customer base and assure a higher bandwidth. In the wireless business the most significant capital expenditures for the coming year are related to increased capacity and 3G services.

TEO continues to improve its financial profile and credit protection measures after significant debt repayments during last year. The company continues to make mandatory and optional principal amortizations which further reduce leverage, resulting in strong financial flexibility over the near term. As of Dec. 31, 2008, the company had a total debt to EBITDA ratio of 0.6x and EBITDA to interest expense of 14.1x, which are both strong for the rating category.

Liquidity risk for TEO is manageable, with year-end 2008 cash balances of ARS1.1 billion, FCF of ARS 1.5 billion, and short-term maturities of ARS 1.3 billion. TEO's debt remains exposed to foreign currency fluctuation. Fitch expects credit-protection measures should continue to improve, driven by a better operational performance, and excess cash flow should be used to reduce debt. Fitch believes that as the mobile business continues to reach maturity, it should result in lower capital expenditures for this segment and should increase consolidated free cash flow for TEO.

Personal's ratings reflect the strong progress in operating performance and credit protection measures, solid brand recognition and market position, improved customer mix and the relationship with parent company Telecom Argentina S.A. (TEO), which now receives Personal dividends. Personal is TEO's most important business unit in terms of consolidated revenues and EBITDA and, as the mobile business gains scale and matures, should contribute more to the group's free cash flow generation. The strong relationship of TEO with Personal is reflected also by cross-default covenants and USD150 million in back-up funding provided to Personal by TEO in case of financial need.

Personal is the wireless provider of incumbent operator TEO, providing services in Argentina and Paraguay. The company has 14.4 million users, 12.6 million in Argentina, as of Dec. 31, 2008. TEO is the incumbent telecommunications provider in northern Argentina, with an integrated service offering consisting, at the end of 2008, of 4.1 million fixed lines, 14.4 million mobile users and 1 million ADSL Internet users. TEO's consolidated revenues and EBITDA for 2008 amounted to ARS10.6 billion and ARS3.3 billion, respectively. TEO is 55% owned by Nortel Inversora, which, in turn, is jointly controlled by Telecom Italia and the Werthein Group.

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