Fitch Revises ENTEL's Outlook to Negative; Affirms Rtgs at 'BBB+'

lunes 30 de marzo de 2015 15:02 GYT

(The following statement was released by the rating agency) CHICAGO, March 30 (Fitch) Fitch Ratings has affirmed the long-term foreign and local currency Issuer Default Ratings (IDRs) of Empresa Nacional de Telecomunicaciones S.A. (ENTEL) at 'BBB+'. Fitch has also affirmed the company's USD800 million senior unsecured notes at 'BBB+' and National Long-term Rating at 'AA-(cl)'. The Rating Outlook on the IDRs and National Long-term rating has been revised to Negative from Stable. A full list of rating actions is available at the end of this commentary. ENTEL's ratings reflect its leading market position in the Chilean mobile telecommunications industry, fully integrated service portfolio, strong brand recognition, as well as the moderate regulatory risk in Chile and Peru. Conversely, the ratings are tempered by increasing industry maturity in Chile, the company's aggressive growth strategy in Peru, and increased leverage compared to its historical level. The Negative Outlook reflects ENTEL's continued negative free cash flow (FCF) generation and deterioration in its leverage due to its aggressive marketing campaign and network investment in Peru in order to quickly achieve a sizable operational scale and market share. Fitch does not expect this trend to reverse in the short- to medium-term as ENTEL will likely remain focused on improving its market position in Peru, where the underlying industry growth potential is higher than the more mature Chilean market. The company's Peruvian annual EBITDA generation is likely to remain in negative territory until 2016 as the breakeven would be achieved during 4Q'16 or 1Q'17. Based on the aforementioned factors, Fitch forecasts the company's net debt-to-EBITDA to peak at 3.5x in 2015 followed by 2.8x in 2016 (4x in 2015 and 3.3x in 2016, based on net debt-to-EBITDAR, including rental expenses), which is deemed high for its rating level and worse than Fitch's previous expectation. ENTEL's net debt-to EBITDA was 2.9x at end-2014, which compares unfavorably to 1.8x a year ago. Although Fitch believes a gradual reduction in leverage could be possible from 2016 and onward as Peruvian operations turn around, ENTEL's failure to restore its net leverage to 2x over the medium term due to continued aggressive investment in the absence of disciplined cash flow management would pressure the ratings. KEY RATING DRIVERS Increased Leverage; Negative FCF ENTEL's leverage materially increased in 2014 due to continued negative FCF generation, mainly driven by its aggressive network investments and marketing efforts for its Peruvian operation, Entel Peru, amid increasing competitive pressures. The company's cash flow from operations (CFFO) was USD762 million (CLP438 billion) in 2014, which was not enough to cover USD977 million (CLP561 billion) of capex and USD96 million (CLP55 billion) in dividends. As a result, Entel's total gross debt grew to USD2.3 billion (CLP1,455 billion) at end-2014, which unfavorably compares to USD1.6 billion (CLP840 billion) at end-2013 and USD925 million (CLP436 billion) at end-2012, which led to the increase in net-debt-to-EBITDA to 2.9x from 1.8x and 0.7x, respectively, during the same period. Reflecting Fitch's adjustment for the company's operational lease expenses as off-balance-sheet debt, adjusted net leverage was 3.4x at end-2014. This level of leverage is considered high for ENTEL's rating level and worse than Fitch's previous forecast. Fitch does not believe the company would be able to curb the negative FCF generation in 2015 and 2016 given its growth strategy and high capex needs under the competitive operating environment in both Chile and Peru. As such, ENTEL will have limited ratings headroom going forward. The company has decided to maintain a low dividend payout ratio up to 50% of net income, which compares with up to 80% historical, in order to cope with the weak cash generation in the short term. Weak Cash Generation in Peru: High investment needs at ENTEL Peru will continue to negatively affect ENTEL's financial profile over the medium term. ENTEL Peru is projected to continue its negative EBITDA generation until 2016, which is longer than Fitch's previous forecast, due to its high subscriber acquisition costs, mainly handset subsidies. In 2014, its sales were USD264 million while EBITDA was negative USD180 million. Capex will remain high as the company plans to invest around USD200 million per year in 2015 and 2016. The company plans to fund these investments mainly with the proceeds from the USD800 million notes issued in 2014. Positively, the ongoing geographical diversification of the company's cash generation should benefit its credit profile over the long term. ENTEL Peru is the third player in the Peruvian mobile market, with a 5% market share at the end of 2014. With its strong 4G service promotion, the company increased its subscriber base by 11.7% to 1.7 million during 2014, of which 52% were postpaid. Entel Peru also complements ENTEL's existing fixed-line operation in Peru, through its other subsidiary, Americatel Peru, and it should be able to provide a convergent service for its corporate clients. Americatel generated USD42 million in revenues in its IT services business and USD54 million of revenues in the call center business in 2014. Stable Chilean Operation: ENTEL's main operation in Chile remained stable during 2014 and Fitch forecasts this trend to continue in 2015 and 2016, despite increasing industry maturity. Sales from the company's Chilean operation contracted by 6% in 2014 from 2013, but this was mainly due to the 75% reduction in interconnection rates for the industry. Although this had a negative impact on ENTEL's revenues (of USD300 million), the net impact on EBITDA was marginal as it was only negative USD30 million. As ENTEL focused its strategy on increased penetration of mobile data service and the postpaid segment, as well as corporate clients, the company was able to maintain its Chilean EBITDA margin at about 28% in 2014, in line with the 2013 level. Strong Liquidity: After the issuances of an International Bond (USD800 billion) for finance investments and a National bond for USD300 million (to refinance debt), the company could strengthen its liquidity position, reaching cash of CLP378 Billion (USD603 million), concentrated in time deposits. With these issuances, the company could extend the previous maturities of 2014 and 2015 (USD300 million), and move their next maturities, for USD150 million (each year), to 2016 and 2017. However, Fitch expects this cash will decrease in the medium term as the company accomplishes its investment plan in Peru. KEY ASSUMPTIONS --Chilean operation revenues to grow by mid-single-digits in 2015 and 2016; EBITDA margin to remain stable; --Peruvian operation's annual EBITDA generation to remain negative until 2016; EBITDA margin in 2017 expected to be about 10%; --Capex-to-sales ratio to gradually fall from 33% in 2014 to 22%-21% in 2015 and 2016; --FCF generation to remain negative until 2016; --Net debt-to-EBITDA leverage to peak at 3.5x in 2015 and fall gradually to 2.5x in 2016 and 2x in 2017. RATING SENSITIVITIES Negative: Stability in the ratings will hinge largely on the turnaround of its Peruvian operation. Fitch acknowledges that Entel's leverage should peak in 2015. A higher-than-expected capex and/or marketing expense resulting in its net leverage increasing to above 3.5x at the end of 2015 could result in a ratings downgrade. Also, a lack of indication that the company's net leverage could be restored back to 2x over the medium term would pressure the ratings. Positive: Fitch does not foresee a positive rating action in light of ongoing investment plans in Peru and Entel's increased leverage compared to historical levels. Fitch has affirmed the following ratings -Foreign- and Local-Currency IDRs affirmed at 'BBB+'; Outlook revised to Negative from Stable; -USD800 million senior unsecured notes due in 2026 affirmed at 'BBB+'. For National Ratings: -National Long-term rating affirmed at 'AA-(cl)'; Outlook revised to Negative from Stable; -Debt issuance programs #674 (Series K and L, registered but not issued) and #675 (Series M) affirmed at 'AA-(cl)'; -Commercial Paper affirmed at 'AA-/N1+(cl)'; -Equity rating affirmed at First Class, Level 1. Contact: Primary Analyst Alvin Lim, CFA Director +1-312-368-3114 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Francisco Mercadal Associate Director +56-02-2499-3340 Committee Chairperson Daniel R. Kastholm, CFA Regional Group Head - Latin America +1 312-368-2070 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available at '' Applicable Criteria and Related Research: --'Corporate Rating Methodology'(May 28, 2014). Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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