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Moody's changes Millicom's outlook to negative

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Moody's has affirmed the corporate family rating ("CFR") of Millicom International Cellular and changed the outlook to negative from stable. The change in outlook was based on higher leverage pro forma for the announced combination of Colombia Movil's and UNE's operations in Colombia, which could take time to improve given current challenging operating environment across Millicom's geographies.

On July 22, 2013, Millicom announced that it has reached an agreement with Empresas Públicas de Medellín (EPM) to combine their respective mobile, TV, broadband and telephony businesses in Colombia; closing is expected for the first quarter of 2014. The transaction will require Millicom to raise additional debt to fund the combination of Colombia Movil (brand name Tigo) with UNE EPM Telecomunicaciones (UNE).

Moody's expects that, pro forma for the announced transaction, Millicom's adjusted gross debt leverage will be close to 3 times at year end 2013, which negatively compares with one of Moody's target rating downgrade triggers for the company, that is 2.5 times adjusted gross debt to EBITDA. However, the ratings affirmation was based on Moody's expectation that, by the end of 2014, Milicom's adjusted gross leverage should decline as it incorporates the EBITDA from UNE.

The Ba1 corporate family rating on Millicom reflects (i) the group's overall strong credit metrics for its rating category; (ii) solid markets shares in its most important geographies; and (iii) the continuing progress made by the group towards achieving a better balance of profits and cash flow generated between the various regions.

Moody's believes that the announced transaction is accretive given i) a favorable regulatory environment for competitive telcos in Colombia; ii) the stable operating environment in the country and the recent sovereign rating outlook change to Baa3 positive from Baa3 stable; and iii) the fact that Millicom has been operating in Colombia since 2006, which provides comfort that target operating and financial results should be achieved without major surprises.

However, the negative rating outlook is based on the risk that consolidated EBITDA margin will remain under pressure given widespread adverse regulatory environments across Millicom's geographies, which has been placing pressure on profitability. Despite Millicom's commitment to rapidly return to a leverage ratio close to 1 time net debt to EBITDA, deleveraging may turn out more difficult and lengthy than anticipated in light of current operating conditions.

Pro forma for the proposed transaction and related additional debt to be raised in the next quarters, Millicom's liquidity is adequate. Moody's anticipates that, during the next six quarters ending in December 31, 2014, the company should be able to use cash on hand of USD 914 million as of June 30, 2013, projected EBITDA and about USD 1 billion in new debt to pay for the proposed combination of UNE (USD 1.2 billion), fund capex and also fulfill cash obligations such as interest payments, working capital and taxes. In Moody's liquidity analysis, it assumed that, in 2014, Millicom will refrain from paying dividends materially higher than what was paid so far in 2013, that is, USD 264 million.

Downward pressure on the ratings could develop as a result of, pro forma for the announced transaction, (i) adjusted leverage not declining to close to 2.5x during 2014; (ii) higher-than-anticipated shareholder remuneration, or (iii) a material debt-funded acquisition. Any visible increase in risk in any of the countries in which Millicom operates or in the group's liquidity profile could also exert negative pressure on the rating.

Positive pressure on the rating could develop if (i) the group's sustainably maintains its adjusted gross debt leverage below 2x; (ii) its free cash flow/debt ratio remains around 10%; and (iii) the group 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) a continued track record with regard to the group's financial policy.

EPM currently controls 99.9% of the shares of UNE. At the end of June 2013, UNE, combined with its affiliates EDATEL and ETP, was one of the leading providers of fixed broadband, telephony and pay TV services in Colombia, with close to 1.3 million fixed broadband customers, 1.1 million pay TV customers and 1.6 million fixed telephony users. UNE's fixed network covers in excess of 2.6 million homes with HFC, predominantly in the cities of Medellin, Pereira, Manizales and several other municipalities in the department of Antioquia, out of 13 million households countrywide. The company, with its affiliates, provided at end of June 2013 services to a total of 2.3 million households.

Colombia Movil is the third largest mobile company in Colombia, with over six million customers. The company is currently 50% plus 1 share owned by Millicom, 25% owned by UNE and 25% owned by ETB. After combining its operations with those of UNE, Colombia Movil will be 50% plus 1 share owned by EPM and 50% less one share owned by Millicom.

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Tags: millicom  Colombia