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Fitch Affirms Philippines' Globe at 'BBB-'; Outlook Stable

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Fitch Ratings has affirmed Philippines based Globe Telecom Inc.'s (Globe) Long Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB '. The senior unsecured and National Long Term Rating were also affirmed at 'BBB ' and 'AAA(phl)' respectively. The Outlook is Stable on all the issuer ratings.

Improving Market Position

­Globe's ratings benefit from its second-largest position in the Philippines' duopoly telecom market. It competes with market leader Philippine Long Distance Telephone Company (PLDT; BBB/Stable) in all three segments - wireless, fixed line and broadband - commanding around 43% of revenue market share in mobile and broadband. Its share of the mobile market improved during 2010-13 to 43% from 34% after it increased handset subsidies and penetrated rural areas, where it was earlier not present.

Stable Leverage

Fitch forecasts Globe's funds flow from operations (FFO)-adjusted net leverage to remain stable at around 2.5x over the medium term. This is despite continued large capex and dividend commitments and declining profitability thanks to a PHP10bn capital injection. Globe raised PHP10bn in August 2014 by issuing 20 million 5.2% non-voting and non-redeemable preferred shares. As the dividends on these instruments are cumulative, Fitch has accorded them equity credit of only 50% in line with its methodology on treatment and notching of hybrids in non-financial corporates.

Margin Erosion

Fitch said that it expects operating EBITDAR margin to decline gradually by 50bp-100bp (2013: 44.3%) each year over 2014-17 as lower-margin data services replace higher-margin traditional voice/text and long distance services. Competition is intense in the data segment as both telcos continue to offer handset subsidies and are only gradually migrating to volume-based tariffs from unlimited tariffs. Globe's revenue is likely to rise by mid-single digits in 2015, greater than PLDT's growth; given it has a higher proportion of smartphone users.

Negative FCF

Globe's 2014-15 free cash flow (FCF) is likely to continue to be negative as cash generation will fall short of capex needs and dividend commitments. FCF margin was negative 5% during 2012-13. Globe's expansion of its 3G/4G networks will keep its capex/revenue high at around 29%-30% (2013: 30.5%).

The company is investing much more aggressively than PLDT even though its revenue is only 60% of the latter's, with capex of PHP29bn in 2013 compared with PLDT's PHP28.7bn. Fitch believes that Globe will continue to pay about 85%-86% of its net income in dividends, in line with its policy to pay 75%-90%.

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