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Fitch Affirms Comcel Trust at 'BB+'; Outlook Stable
March 9, 2017 / 10:26 PM / in 5 months

Fitch Affirms Comcel Trust at 'BB+'; Outlook Stable

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(The following statement was released by the rating agency) CHICAGO, March 09 (Fitch) Fitch Ratings has affirmed the long-term foreign and local currency Issuer Default Ratings (IDRs) of Comcel Trust (Comcel) at 'BB+' with a Stable Outlook. Fitch has also affirmed Comcel's USD800 million senior unsecured notes at 'BB+.' Comcel Trust (Comcel) is a special-purpose vehicle (SPV) created in the Cayman Islands to issue USD 800 million senior unsecured notes on behalf of Comcel Group (Comcel), a group of several legal entities providing primarily mobile telecommunication services under the Tigo brand. The ratings of the trust are based on the combined credit profile of Comcel, of which entities jointly and severally guarantee the note on a senior unsecured basis. Comcel's ratings reflect its strong market position as the leading mobile provider in Guatemala and its robust financial profile, with low leverage for the rating category. The company's ratings are tempered by its lack of geographical and service revenue diversification, as well as high shareholder returns which limit any material deleveraging. Comcel's ratings are closely linked to that of its parent, Millicom International Cellular S.A. given its strong financial and strategic linkage. Comcel Trust is a 55%-owned subsidiary of Millicom International Cellular S.A. (MIC, 'BB+'/Outlook Stable). KEY RATING DRIVERS Leading Market Position: Fitch believes that Comcel's strong market position will remain intact supported by its extensive network and distribution coverage, stable quality of service, and strong brand recognition under the 'Tigo' brand. As of Sept. 30, 2016, Comcel had 9.1 million subscribers resulting in a 57% market share. In addition, the company's high-end subscribers focused promotion strategy has enabled its EBITDA market share to account for over 64% of the industry EBITDA, well above its subscriber market shares. Fitch expects Comcel's competitive strengths to help ward off competitive pressures over the medium term. Slow Revenue Growth: Fitch forecasts Comcel will undergo low single-digits revenue growth over the medium term, mainly driven by continued growth in data and cable revenues which help offset voice revenue erosion, following by its modest revenue contraction in 2016. Strong demand for mobile data, supported by increased penetrations of smart phones and data plans, will continue to offset the pressured voice ARPU to an extent. Additionally, the company's continued investment in fixed-line services will result in an increased contribution from both fixed-line broadband and cable TV. Fixed Line Growth: Fitch projects Comcel's fixed broadband and cable TV segments will undergo strong double-digit revenue growth over the medium term given its increasing investment in network coverage expansion, including acquisitions. The segment remains relatively underpenetrated and highly fragmented which should provide Comcel with ample room to grow, as well as opportunities to consolidate the market by acquiring small players. Fitch expects the revenue proportion of the Tigo Home segment will reach 8% by 2018, which positively compares to 4% in 2015. Solid Margins: Comcel boasts one of the highest operating margins among telecom operators in the region with an EBITDA margin of 48% as of LTM ended Sept. 30, 2016. Comcel's EBITDA margin has been trending down from 51% in 2014 as a result of average revenue per unit (ARPU) erosion from declining voice/SMS revenues and competitive pressures. Additionally, an increasing contribution from lower-margin fixed-line and equipment sales will continue to pressure the margin towards 48%. Nevertheless, this level of margin still compares favorably with its regional peers. Low Leverage: Fitch expects Comcel to maintain moderately low leverage for the rating category, with its net debt to EBITDAR to remain below 2.0x over the medium term, backed by its solid operational cash generation. Fitch does not foresee any material improvement in the company's financial profile due to the aggressive shareholder return policy in the medium term. Despite solid cash flow from operations (CFFO), estimated to be above USD450 million which fully covers annual capex requirement, dividend payments could continue to pressure Comcel's FCF generation into negative territory. DERIVATION SUMMARY Comcel's credit profile is strong compared to its regional telecom peers in the 'BB' rating category given its high profitability, robust cash flow generation, and low leverage, underpinned by its leading market shares and solid network quality and coverage. The company's regulatory risk is also considered to be low. Negatively, the company lacks geographic and service revenue diversification. Parent/Subsidiary Linkage is applicable given MIC's strong influence over Comcel's operations and MIC's reliance on Comcel's dividend upstream. The ratings are not constrained by the Country Ceiling of Guatemala. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: --Low-single-digit revenue growth; --Double-digit revenue growth in fixed-line operations; --EBITDA margin to trend down towards 45% over the long term; --Capex-to-sales, excluding spectrum costs, remaining around 13-14%; --Net leverage to remain comfortably below 2.0x over the medium term. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: A positive rating action on Comcel would likely be linked to a positive rating action on MIC. During 2016, MIC's overall financial profile remained stable, partly driven by continued successful integration of UNE and Tigo in Colombia. MIC's business position and overall financial profile continue to be solid for the rating category. As a holding company, MIC improved its ability to mitigate dividend risk from its subsidiaries due to potential sovereign constraints when it obtained a five year, $600 million revolving credit facility. Continued improvement in MIC's overall financial results and the conclusion of the pending investigation at Comcel regarding improper payments could lead to positive rating actions for both entities. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action A negative rating action on MIC may negatively affect Comcel's ratings, given its linkage. Net debt-to-EBITDAR increases to above 3.0x without a clear path to deleveraging due to any of the following: --Deterioration in MIC's financial profile leading to more aggressive shareholder distributions; --Weaker cash generation due to competitive or regulatory pressures on its operations; --M&A activity. Any potential material financial impact from the ongoing investigation regarding the improper payment may also pressure the ratings. LIQUIDITY Solid Liquidity: Comcel has a solid liquidity profile backed by its high cash balance, stable cash flow from operation (CFFO) and well-spread debt maturities. As of the LTM ended Sept. 30, 2016 the company generated US507 million in CFFO and held US645 million in cash and equivalents, which compares favorably to no short-term debt. The company faces no debt maturities until 2024 when its bond matures. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Comcel Trust --Long-term foreign currency IDR at 'BB+', Stable Outlook; --Long-term local currency IDR at 'BB+', Stable Outlook; --USD800 million senior unsecured notes at 'BB+.' Contact: Primary Analyst Alvin Lim, CFA Director +1-312-368-3114 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Diana Barriga Associate Director +1-312-606-2319 Committee Chairperson Joe Bormann, CFA Managing Director +1-312-368-3349 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Date of Relevant Rating Committee: March 8, 2017 Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020350 Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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