November 23, 2016 / 4:11 PM / 2 years ago

Moody's sees Latin American phone companies curbing investment

SAO PAULO, Nov 23 (Reuters) - Latin American phone carriers will slow capital spending for the next couple of years amid a widespread economic slowdown and still-high debt, Moody’s Investors Service said on Wednesday, a sign the industry is prioritizing debt reduction over growth in the near term.

Analysts led by Marcos Schmidt said in an report that the so-called capital intensity metric, which measures how much of revenue is consumed by fixed capital spending over time, may decline to about 16.6 percent by December 2018 from about 20 percent two years ago.

The slowdown in capital spending, partly due to maturing fourth-generation capacity investments from recent years, could leave operational profit margins at an average 7.3 percent in 2018, from almost zero in 2014, the report said. As a result, the risk of underinvestment will intensify beyond the next two years.

The report underscores how eroding growth and household income from Mexico to Chile in the past two years hammered the ability of phone companies to profit from rising demand for data and digital mobility services. The investments made to meet such demand led some of the region’s biggest carriers to take on too much debt, sparking a handful of bankruptcy protection cases since 2013.

“Higher leverage will also make disciplined liability management a greater priority next year,” Schmidt and his team wrote.

Capital spending at Latin American phone companies is seen stable at an average $16.3 billion over the 2017-2018 period, the report said.

Brazil’s gradual recovery next year will likely benefit the industry, with Telefónica Brasil SA best positioned to benefit from strong consumer recognition and budget discipline, the report said.

The analysts blamed Oi SA’s current in-court reorganization - Brazil’s largest ever - on “a risky business strategy and inadequate capital structure.” Oi could likely become target of a takeover once the restructuring of 65.4 billion reais ($19.3 billion) in debt is finalized, the report said.

$1 = 3.4016 reais Reporting by Ana Mano; Editing by Guillermo Parra-Bernal and Frances Kerry

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