From the Wires
Fitch Expects to Rate Empresa de Telecomunicaciones de Bogota's Proposed Notes 'BBB-(exp)'
By: Business Wire
Jan. 9, 2013 06:46 PM
Fitch Ratings expects to rate Empresa de Telecomunicaciones de Bogota S.A. E.S.P.'s (ETB) proposed senior unsecured notes due 2023 'BBB-(exp)'. The senior notes will be denominated in COP for the equivalent of USD300 million and will be payable in USD at the average exchange rate of the prior five days. Proceeds from the issuance are expected to be used to fund the company's capital expenditure plan. Fitch currently rates ETB foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with a Stable Rating Outlook.
ETB's ratings are supported by the company's sound financial profile, consistent track record of cash from operations (CFO) generation and its leading positions in local and broadband services in Bogota. Conversely, the ratings are tempered by increased competition, mobile substitution, and limited geographical footprint and service revenue diversification. ETB's ratings take into account its plan to raise additional debt which proceeds are expected to fund its capital expenditure plan. The ratings incorporate company's strategy focused in strengthening its network and infrastructure in order to deliver convergent service offerings, which will increase leverage and will result in negative free cash flow (FCF) over the next three years.
ETB's 'BBB-' foreign currency rating (FC IDR) rated at the same level of District of Bogota, (rated 'BBB-' by Fitch) has historically recognized that the linkage between parent and subsidiary is weak and non-dependent. Although ETB is owned by the District of Bogota (the district), the company has an independent management and historically has maintained a conservative financial profile. ETB's dividend payment is not material for the district's finances. Fitch expects the relationship between the district and ETB will not affect the company's business risk and financial profile.
ETB benefits from its position as the incumbent fixed line operator in Bogota which historically has resulted in FCF generation. Bogota is the most important and competitive market in the country, which at the same time exposes it to strong competitive pressures. ETB has an estimated 71% of lines in service in Bogota, 43% of broadband accesses and an extensive network coverage which allows it to offer multiple services to the corporate segment located in Bogota as well as in other major cities. However, given the importance of this market many competitors participate in it and have gained market share at the expense of the company.
Fitch expects that in the next few years, revenues from internet, data and Pay-TV will represent about 70% of total revenues helping support EBITDA, which is tied to the ability of the company to increase its market share in a highly competitive environment with strong and aggressive participants. ETB's strategy aims to strength their competitive position by investing over the next six in upgrading its network infrastructure to diversify and offset revenue decline in the traditional local services. ETB's capex plan comprises mainly deploying fiber to the home (FTTH), the development of a Pay-TV offering and IT services for the corporate segment. ETB derives more than half of its operational generation from local and long distance services, which are expected to decrease over the medium term. Revenue growth from data and internet, including FTTH and other related businesses, are expected to offset the decrease in traditional revenues in the long term.
The company has managed to sustain its EBITDA generation and compensate the decline in traditional local fixed telephony and long distance revenues though the growth of internet and data revenues along with the reduction of expenses. For the 12 months ended Sept. 30, 2012, revenue was 4.1% lower than the same period of the previous year and EBITDA margin was 45.6% which still compares favorably with its peers. Fitch expects EBITDA margin continue declining during the next years, due to competitive pressures and changes in revenues mix, as newer services are introduced.
Fitch expects forthcoming years' negative FCF generation as a result of the capital expenditure plan which should be funded mainly with cash flow from operations and potential additional indebtedness. The company has some flexibility in their capex to the extent that approximately 30% is success based and can benefit FCF generation. This should give the company flexibility to maintain a stable capital structure with a manageable maturity profile. ETB has historically generated robust cash flow which has allowed them fund their investments and maintain a conservative financial profile. Company's cash flow generation remains strong and has covered company's capex and dividends, resulting in a positive free cash flow (FCF) generation.
The rating incorporates that leverage should remain moderate. Fitch expects ETB's FFO adjusted leverage and adjusted debt to EBITDAR to be close to 1.5x within the next five years. Leverage has maintain a downward trend in recent years and the decision of the company to fully fund their pensions and take this obligation out of its balance, allows to partially offset the expected increase in debt without a significant deterioration in its credit profile. For the 12 months ended Sept. 30, 2012, funds flow from operations(FFO) adjusted leverage and debt to EBITDA was 0.4x, respectively. By adjusting the debt for contingencies, lease of satellite frequencies, unfunded pension liabilities and guarantees to Colombia Movil, results in an adjusted leverage ratio of 1.3x EBITDAR.
The company's liquidity position is strong and is supported by high cash balances, low debt levels, a comfortable debt maturity profile and historical positive FCF generation. After the proposed transaction the company's debt will be entirely represented by the proposed US$300 million senior notes due in 2023. The company plans to prepaid current debt with cash balances. All debt will be denominated in COP, mitigating any currency risk. As of Sep. 30, 2012 cash balances amounted to COP539.4 billion, which positively balance against ETB's total debt of COP277.0 billion.
Key Rating Drivers
A positive rating action is unlikely at the moment given the increase in leverage and expectation of negative FCF over the next few years.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Inability by ETB to compensate a decline in revenues and EBITDA that results in a sustained increase in adjusted (for contingencies, pension liabilities and leases) leverage over 2.0x.
--Likewise additional investments that involve debt with lower than expected operational generation could trigger a downgrade.
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' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 9, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Corporate Sector Credit Factor Guidelines-All Sector 2012'
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
National Ratings Criteria
Corporate Sector Credit Factor Guidelines - All Sectors 2012
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