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Fitch Affirms Millicom's Debt Ratings at 'BB+'; Outlook Stable

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Fitch Ratings has affirmed Millicom International Cellular's long term debt ratings at 'BB ' with a Stable Outlook.

Fitch said that MIC's ratings reflect the company's geographically diversified portfolio, leading market positions in most of its markets, good liquidity and solid pre-dividend free cash flow (FCF) generation. The ratings are tempered by the company's increasing leverage due to recent M&A activities, historically-high shareholder returns, exposure to markets with low sovereign ratings and low GPD per capita, pricing pressures, and debt allocation between subsidiaries and holding company.

Temporary Hike In Leverage

Negative pressure on MIC's ratings is increasing as its financial leverage will significantly increase when the company completes the merger between its subsidiary, Colombia Movil, and UNE in the first half of 2014. The merger will increase MIC's net debt by USD1.3 billion which will result in its financial net leverage, measured by total adjusted net debt to operating EBITDAR, rising above 2.0x in 2014 from 1.5x at end-2012.

However, Fitch believes the expected increase in leverage to be temporary in 2014, as the company is likely to reduce its aggressive shareholder return policy. The company paid only USD264 million dividend in 2013. This was a sharp reduction from USD731 million including share repurchase in 2012. Fitch believes total shareholder returns in 2014 and 2015 will remain in line with the 2013 level, which will lead to positive FCF and leverage of less than 2.0x over the medium term.

A slower-than-expected deleveraging due to a lack of the company's commitment to restraining dividends, acquisitions, or a further deterioration in its operating performance will immediately place negative pressure on the ratings.

Margin Erosion

MIC's EBITDA margin is likely to continue to deteriorate in 2014 and 2015 due to intense competition. Mobile ARPU is trending downwards in all of its operational geographies amid increasing market saturation in Latin America. In addition, the increasing revenue proportion of less-profitable fixed-line business and online services will place pressure on margins. Some of the increase in fixed line revenue is attributable to the merger with UNE. In 2012 and 2013, the company recorded a negative EBITDA growth despite a stable subscriber number growth, suppressing the margin down to 37.3% and 39.8% in the first nine months of 2013 and 2012, respectively, from about 44% in 2009-2011.

Improving Competitive Position In Colombia

The planned merger with UNE will strengthen MIC's market position in Colombia, as UNE's fixed-line network and products complement MIC's operation in terms of both geography and products offerings. The merger will also enhance product diversification, as well as operational cost savings. This synergy is important for MIC as Colombia has been the fastest growing market in terms of revenue contribution among MIC's markets. Although any dividend upstream is not likely for the foreseeable future given the high leverage of the newly formed entity, the addition of UNE will help MIC turn around its EBITDA growth from 2014.

MTN Investment Into AIH Is Positive

The MTN Group's (MTN) investment to acquire a third of the stake in MIC's online business joint venture, African Internet Holding (AIH), is positive from both financial and operational perspectives. MTN's local expertise, as Africa's largest mobile operator, can be of great value to AIH's business strategy. In addition, as this investment will provide much needed cash for EBITDA-loss-making operation of AIH, MIC will not inject additional capital into this venture beyond the already-committed amount of EUR35 million in 2014.

Concentration In Low-Rated Sovereigns

Despite the diversification benefit, MIC's ratings are constrained by its operational footprint in only Latin America and Africa with low sovereign ratings and GDP per capita. The operational environment in these regions, in terms of political and regulatory stability and economic conditions, tend to be more volatile than developed market which could potentially affect MIC's operations negatively. This also adds currency mismatch risk as 36% of MIC's total debt at end-September 2013 was based on USD while most of its cash flows are generated in local currencies in each country.

Leading Market Positions

MIC has retained its market leader positions in most of its key cash generating operating companies in Latin America backed by its effective marketing strategy, strong brand recognition, and extensive network and distribution channels. The company's subscriber growth remains solid, adding 1.5 million new mobile subscribers in the third quarter of 2013 (3Q'13), and its increasing investment into fixed-line and media will help provide increasing cross-selling opportunities to acquire more revenue generating units. Fitch believes MIC's market position in key markets will remain intact in the short to medium term.

Diversifying Revenue Mix

MIC's future revenue growth will be more centered on non-voice/SMS services as it tries to alleviate pressures on the traditional voice/SMS revenues. As a result of its strategy, 56% of the total revenue growth in the first nine months of 2013 was generated from the non-mobile segment such as online, mobile finance, and media. Therefore, mobile revenue portion is likely to decline below 70% in 2015 from about 83% in 2013.

Sound Liquidity

As of Sept. 30, 2013, the consolidated group cash was USD1.0 billion and total on-balance sheet debt was USD3.4 billion, with 24% allocated to the holding company. Debt maturities are well spread with an average life of five years. Fitch does not foresee any liquidity problem for both the operating companies and the holding company given operating companies' stable cash generation and their consistent cash upstream to the holding company.

Dividend streams mitigate structural subordination

The creditors of the holding company may be subject to structural subordination to the creditors of the operating subsidiaries given all cash flows are generated by subsidiaries, which held 76% of the total group debt at end-Q313. However, it is our view that a very stable and high level of cash upstream, mostly through dividend, by subsidiaries is likely to remain intact over the long term. Therefore, Fitch does not foresee any material risk from this structural weakness.

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