Fitch Affirms Telefonica Moviles Chile at 'BBB+'; Outlook Stable
Fitch Ratings has affirmed Telefonica Moviles Chile's debt ratings, and confirmed the stable outlook for the company.
Telefonica Moviles Chile's ratings reflect its strong market position, mobile services portfolio, moderate regulatory risk and financial flexibility. Telefonica Moviles Chile's solid financial profile incorporates the expectation of stable leverage and strong funds from operations (FFO) generation. The ratings also take into account the leadership position of Telefonica Moviles Chile in Chile, strategy and capacity to improve the mix of post-paid customers by upscaling services to customers and approach to preserve and maximize average revenue per user (ARPU).
The ratings also consider ownership by Telefonica. In the event that Fitch downgrades Telefonica by one notch, Fitch believes that Telefonica Moviles Chile ratings can stay at 'BBB+' provided the company keeps its financial policies unchanged and Telefonica liquidity position remains manageable.
However future multiple notch downgrades of Telefonica are likely to drag Telefonica Moviles Chile ratings. Telefonica also owns Telefonica Chile which offers complementary fixed telecommunication services. The relationship between these companies allows Telefonica Moviles Chile to achieve synergies in costs and investments, manage a single brand and unification of points of sale, among other things.
Mobile Broadband Growth to Continue:
Fitch believes value-added services (VAS) and mobile broadband should help mitigate a future slowdown in revenue growth from traditional voice services, given the level of mobile penetration in the country and expectation of access charges declines in 2014. Widespread adoption of data services through smartphones offers potential revenue growth that should be sufficient to offset traditional voice and interconnection revenue declines in the future. (approximately 13% of mobile users have data services). Revenues from mobile broadband (excluding text messaging) now account for approximately 12% of service revenue. According to Subtel, as of June 30, 2012 penetration of mobile voice reached 128.9% or 22.4 million users.
Strong Competitive Environment:
Competition is strong. Additionally, the introduction of number portability in December 2011 and the entrance of MVNOs have intensified competition. Number portability has resulted in net ports of 75,000 of Telefonica Moviles Chile to other providers as of Sept. 10, 2012. However new additions have offset this effect. Fitch expects this trend to continue as Telefonica Moviles Chile has focused more on profitable growth. MVNOs should have a mixed effect to Telefonica Moviles Chile's results as they should add competition. However, target niche markets and the agreement to provide network infrastructure to them should continue to provide Telefonica Moviles Chile's cash flow with solid margins.
Lower Interconnection Rates Expected:
Fitch expects a significant reduction in mobile termination rates during the tariff setting process of next year (effective starting 2014). The mobile termination rate could decline 50% or more. With a rate reduction of this magnitude, revenues coming from interconnection may decline materially to consolidated revenue. Mobile data revenues growth should compensate for revenue declines related to reductions in mobile interconnection rates. Longer term, Fitch views mobile termination rates as converging to the fixed termination rates.
Strong financial profile and extended maturity profile:
Fitch incorporates in its ratings for Telefonica Moviles Chile that leverage measured by total debt to EBITDA should be close to 1.0 time(x) in the long term. Increased FFO and relatively stable capital expenditures should result in growing free cash flow over the next few years. This in turn should strengthen Telefonica Moviles Chile's ability to meet its financial obligations. For the 12 months ended June 30, 2012 leverage measured as total debt to EBITDA stood at 1.1x and net debt to EBITDA at 0.3x. Telefonica Moviles Chile's maturity profile is very manageable. No maturities are schedule until 2014, when CLP58 billion comes due. along with cash and marketable securities of CLP290 billion.
Key Rating Drivers:
Factors that can drive a rating downgrade or Outlook revision to Negative includes multiple notch downgrades of the parent company or if Telefonica Moviles Chile's operating performance declines rapidly due to competition, convergence of services or regulation that results in a sustained increase in leverage over 2.0x. Positive factors to credit quality include an increase in FCF and broader service revenue diversification while maintaining a strong financial profile.