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Fitch Affirms Telefonica Chile's IDRs at 'BBB+'; Outlook Stable
September 11, 2013 / 6:58 PM / 4 years ago

Fitch Affirms Telefonica Chile's IDRs at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, September 11 (Fitch) Fitch Ratings has affirmed Telefonica Chile S.A.'s ratings as follows: -Local Currency Issuer Default Rating (IDR) at 'BBB+'; -Foreign Currency IDR at 'BBB+'; -National scale long-term rating at 'AA(cl)'; -National scale short-term rating at 'N1+(cl)'; -USD500 million senior notes due 2022 at 'BBB+'; -Local bonds series F, M and N at 'AA(cl)'; -Equity rating at level 4. The Rating Outlook is Stable. KEY RATING DRIVERS Telefonica Chile's ratings reflect its leading position in the Chilean fixed-line telecommunications market, sound financial profile and solid cash flow generation. The ratings take into account a strong competitive environment, low regulatory risk, weaknesses in local traffic and the policy of returning cash to shareholders. The company's strong cash flow generation and financial profile are the result of strong brand equity, leading position, and operational experience, despite competitive challenges. The ratings take into account ownership by Telefonica S.A. (TEF), rated 'BBB+' with a Negative Outlook by Fitch. In the event that Fitch were to downgrade TEF by one notch, the agency believes that Telefonica Chile's ratings can remain at 'BBB+' provided Telfonica Chile keeps its financial policies unchanged and TEF's liquidity position remains manageable. However, multiple-notch downgrades of TEF are likely to drag Telefonica Chile's ratings down. Parent TEF also owns Telefonica Moviles Chile S.A., rated 'BBB+', with a Stable Outlook, which offers complementary mobile telecommunication services and supports Telefonica Chile's competitive position. The relationship between both fixed and mobile companies allows Telefonica Chile to achieve synergies in costs and investments, manage a single brand, and unify points of sale, among other things. For the next few years, growth in revenues from broadband and pay-tv should compensate for revenue losses in traditional voice services. This should result in relatively stable EBITDA levels and margins. The number of fixed voice customers is expected to stabilize, underpinned by growth in bundle offerings. Steady revenues, cost efficiencies and expense savings can result in slight improvements to EBITDA margins. Fitch believes the regulatory risk for Telefonica Chile is low. In addition, Telefonica Chile's regulated tariff services revenues are currently not material, which compares favorably with 50% in 2004. Number portability has not been material for Telefonica Chile since its introduction in December of 2011. Of the total decline in net lines in service (LIS) since December 2011, approximately 40% is explained by number portability and the rest by other factors. In Fitch's opinion the company continues to face competitive challenges, especially in traditional voice services. However, the strategy of bundling services should mitigate this effect as approximately 60% of residential LIS are under bundled offerings. Revenues of fixed telecommunications declined 10% in the first half of 2013 versus 2012; however, revenues from Broadband and Pay-TV were not able to fully compensate for the revenue decline of fixed telecommunications revenues. This decline is mainly explained by lower revenues from long distance and flexible plans. Higher Capex Limits FCF: High capital expenditures should limit free cash flow (FCF). Investments should average around CLP200 billion for the next few years, and be mainly focused on Broadband and Pay-TV as well as network upgrades. Telefonica Chile's strategy is focused on increasing broadband access with bundled offerings that include pay television and voice services. This strategy includes increasing investments to offer higher broadband speeds via fiber and Pay-TV services through DTH or IPTV to mitigate declines in LIS, control churn, and increase loyalty among its customers. Sound Financial Profile: Incorporated into Telefonica Chile's ratings is Fitch's expectation that over the long term, total debt-to-EBITDA will remain at or below 2x with positive FCF generation. Company policy for use of cash flow generation is first to maintain a conservative financial profile, then make necessary investments, and then return the excess cash flow to shareholders. As of June 30, 2013, total indebtedness after hedges amounted to CLP466 billion, consisting 52% of international bonds, 20% in syndicated loans, and 28% in local bonds. All the debt is denominated in local currency after hedges and 62% has a floating interest rate. During the last quarter of 2012, Telefonica Chile issued USD500 million in senior notes due 2022 to refinance in advance 2013 and 2014 maturities. This should temporarily increase gross leverage, while keeping net leverage close to historical levels. For the 12 months ended June 30, 2013, leverage measured by total debt-to-cash from operations (CFO) was 1.7x and total debt-to-EBITDA was 1.8x. For this same period, net debt-to-EBITDA was 1.2x. Ratios of CFO interest coverage and EBITDA to gross interest were 10.7x and 9.2x, respectively. RATING SENSITIVITIES: Factors that can drive a negative action to the rating or Outlook include multiple-notch downgrades of parent company Telefonica S.A. ('BBB+', Outlook Negative) or a rapid deterioration in the company's operating performance due to competition, convergence of services, or regulation that results in a sustained increase in leverage over 2.0x. Factors that could drive a positive action are an improvement in credit quality, including reducing and maintaining long-term leverage of total debt-to-EBITDA of 1.0x or below, an increase in FCF, and broader service revenue diversification. Contact: Primary Analyst Sergio Rodriguez, CFA Senior Director Fitch Mexico S.A. de C.V. +52-81-8399-9100 Prol. Alfonso Reyes 2612 Monterrey, Mexico Francisco Mercadal Associate Director +56-2-2499-3340 Committee Chairperson Daniel Kastholm, CFA Senior Director +1-312-368-2070 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Rating Telecoms Companies', Aug. 9, 2012; --'Corporate Rating Methodology'(Aug. 05, 2013); --'National Ratings Criteria', Jan. 19, 2011 --'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', Aug. 05, 2013; --'Short-Term Ratings Criteria for Non-Financial Corporates, Aug. 5, 2013. Applicable Criteria and Related Research: Short-Term Ratings Criteria for Non-Financial Corporates here Parent and Subsidiary Rating Linkage Fitch’s Approach to Rating Entities within a Corporate Group Structure here National Ratings Criteria here Rating Telecom Companies here 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. 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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