Fitch Ratings has affirmed the local and foreign currency Issuer Default Ratings (IDRs) of Telemovil El Salvador, S.A. (Telemovil) and Telemovil Finance Co. Ltd (TF), including the $450 million senior notes due 2017 issued by TF and guaranteed by Telemovil at 'BB'. The Rating Outlook is Stable.
Telemovil's ratings reflect its diversified service offering and platforms, leading positions in mobile and pay television services in El Salvador, strong brand recognition, extensive network coverage, sound financial profile and positive pre-dividend free cash flow. The company's credit quality is tempered by a strong competitive environment in the mobile business, limited geographic diversification and the dependence of the economy on remittances, which affects demand for telecommunications services.
The ratings factor in the relationship with parent company Millicom International Cellular S.A. (MIC), which fully owns Telemovil and TF. These companies benefit from synergies related to the larger scale of the parent and expertise of management but also consider the payment of dividends, royalties and technical fees, loans to affiliates and Millicom's financial position. For the 12 months ended June 30, 2012 MIC had a solid financial profile with US$4.7 billion in revenues, US$2.0 billion in EBITDA, funds flow from operations (FFO) of US$1.6 billion, on balance sheet indebtedness of US$2.7 billion and cash balances of US$900 million.
Price Declines Affecting Mobile Operations:
Telemovil strategy with regard to mobile service should center on increasing value added services, such as mobile financial solutions, to compensate for voice revenue declines. Strong competition has resulted in voice price pressure that resulted in lower voice revenues that, in turn, have not been fully compensated by increases in other services. Lower pace of mobile subscriber additions than competitors has resulted in a 2% decline in market share over the last year to 42%. A more balanced competitive environment is expected once the transaction where America Movil will receive Digicel's operations in El Salvador is approved.
The home and enterprise segments have had positive results. However, the mobile operation has a larger size and is the largest contributor to revenues and cash flow at nearly 70%. Telemovil offers bundled services with its pay-tv subsidiary Millicom Cable, which include residential and enterprise customers. In conjunction with Telemovil's strategy of focusing on differentiated mobile service offerings, this should allow the company to maintain its leading market position in the medium term. Millicom Cable's home segment continue to increase RGUs, mainly driven by fixed broadband services, CATV and (to a lesser extent) fixed lines, with stable ARPU and disconnections.
Fitch believes Telemovil's competitive position will improve due to the offering of bundles with multiple services. However, Millicom Cable customers' quadruple play bundles are currently very limited, and customers with double and triple play bundles still offer penetration growth opportunities. Millicom Cable is the leading CATV provider in El Salvador with approximately 316.6 thousand revenue generating units (RGUs) as of June 30, 2011. Millicom Cable network has close to 80% of bidirectional capability and covers approximately 615,000 homes passed.
Higher Capex for 2013:
Pre-dividend free cash flow should decline in 2013 but still be positive due to increased capital expenditures which are expected be slightly below 20% of revenues. Investments follow the strategy towards data services by increasing 3G coverage and fixed broadband speeds. Pre-dividend free cash flow should return to historical levels during the following years as capex normalizes. Given the good financial position of the parent Fitch believes that payments to MIC, in the form of dividends or royalties and technical fees, can be reduced if needed providing flexibility to Telemovil.
Stable Gross Leverage:
Gross leverage has remained stable despite the operating pressures. For the 12 months ended March 31, 2012 total debt to EBITDA and net debt to EBITDA stood at 2.5 times (x) and 2.1x, respectively. Going forward, Fitch expects that mobile operations should continue stabilizing resulting in stable credit metrics. Excess cash flow from operations after capital expenditures is expected to be used for dividend payments.
As of March 31, 2012 total debt was composed solely of the US$450 million senior notes maturing in 2017 issued by TF and had cash balances of US$67 million. In addition, in 2006 the company lent funds to a holding company owned by MIC sub that owns 50% plus one share of Colombia Movil. The amount outstanding of this loan is US$171 million as of the end to the first quarter of 2012. The ratings incorporate that when Telemovil receives the payment of this loan, approximately US$100 million should remain in cash at Telemovil, further supporting liquidity and reducing the net debt to EBITDA to approximately 1.5x.
Key Rating Drivers:
Negative factors to credit quality include total debt to EBITDA remaining at 2.5x in conjunction with a poor liquidity position or higher leverage due to competitive issues, cash flow deterioration, a change in financial targets of management or a deteriorating financial profile of the parent (MIC). Positive factors to credit quality include Telemovil making firm progress in reducing and maintaining a leverage level of total debt to EBITDA in the range 1.0x-1.5x and/or increased geographical and/or service diversification.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 8, 2012;
--'Operating Leases: Updated Implications for Lessees' Credit, Aug. 5, 2011;
--'Rating Telecom Companies', Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Operating Leases: Updated Implications for Lessees' Credit
Rating Telecom Companies
Sergio Rodriguez, CFA
Fitch Mexico, S.A. de C.V.
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