Moody's Changes Millicom's Rating Outlook to Stable from Positive
Moody's Investors Service has changed the rating outlook on Millicom Cellular to stable from positive. The corporate family rating (CFR) and Probability of Default Rating (PDR) are Ba1.
Moody's said that Millicom's Ba1 CFR continues to reflect: (i) the group's ongoing track record of strong growth and operating performance; (ii) the good visibility for future growth; (iii) the continuing progress towards a better balance of profits and cash flow generated between the various regions; and (iv) the group's strong credit metrics and disciplined financial policy.
At the same time, the Ba1 CFR reflects: (i) the risks inherent to the countries in which Millicom operates; (ii) the maturing voice business and commoditization trend; and (iii) the company's active shareholder remuneration activities, in the form of extraordinary dividends and share buybacks.
The stabilization of the outlook incorporates Moody's views that momentum for upward pressure on the rating is limited in the medium term as growth in voice (Millicom's largest revenue generating segment) slows down in the face of pricing pressures affecting ARPU as well as mobile penetration rates reaching a plateau in some geographies.
In addition, the stable outlook more appropriately reflects the uncertainty over the direction of the company's strategy following the recently announced investment plan in two e-commerce start-ups, Latin America Internet Holding (LIH) and Africa Internet Holding (AIH). Moody's also notes that, although in keeping with Millicom's aim to develop its cable operations, the recent acquisition of Cablevision Paraguay (a local Pay TV operator) for $150 million represents a clear ramp-up in terms of size compared to previously acquired assets.
Moody's will continue to monitor closely the extent to which the company invests further into such new segments, however the rating agency expects that Millicom will continue to abide by its publicly stated intention to operate at a reported leverage close to 1.0x net of group cash and absent any substantial M&A activity. Moody's has also considered the increase in adjusted leverage following the Honduras Put transaction, while recognizing the conditionality of the Put.
Moody's will also continue to assess the company's funding policies. This includes the ongoing requirement to refinance maturing subsidiary debt across a number of countries; and the implications of any debt being raised at a holding company level versus operating subsidiaries. The ratings incorporate Moody's assumption that holding company debt would remain limited, given the need to service such debt through upstreaming of cashflows from countries with a mixed sovereign risk profile; and that a high level of liquidity will be maintained at the holding company.
Further positive pressure on the rating could develop if: (i) the company's adjusted leverage is sustainably managed below 1.5x; (ii) its free cash flow to debt ratio remains around 10%; and (iii) the company retains an adequate liquidity position, both consolidated and at the holding company level.
An upgrade would also require: (i) the group to maintain its strong market positions; (ii) an appropriate balance of risk across the countries in which Millicom operates, with a good level of geographical diversification of cash flows; and (iii) continued track record with regard to the company's financial policy.
Downward pressure on the ratings could develop as a result of: (i) adjusted leverage rising sustainably above 2.5x following a deterioration in Millicom's operating performance or aggressive M&A activity; (ii) a material debt-funded acquisition; or (iii) higher-than-anticipated shareholder remuneration. Any visible increase in risk in any of the countries in which Millicom operates or in the company's liquidity profile could also exert negative pressure on the rating.