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Fitch Affirms Telefonica Chile at 'BBB+'; Outlook Stable
September 27, 2017 / 7:04 PM / 3 months ago

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

(The following statement was released by the rating agency) CHICAGO, September 27 (Fitch) Fitch Ratings has affirmed Telefonica Chile S.A.'s (TCH) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+'. Fitch has also affirmed the company's National long-term rating at 'AA(cl)'. The Rating Outlook is Stable. A full list of rating action follows at the end of this release. TCH's ratings reflect its entrenched leading position in the Chilean fixed-line telecommunications market, strong brand recognition and network infrastructure, and sound financial profile backed by solid operational cash flow generation. The ratings also incorporate its linkage to the parent, Telefonica Moviles Chile S.A. (TMCH), which is a mobile service arm of Telefonica Chile group and is rated 'BBB+'. TMCH offers complementary mobile telecommunication services and allows TCH to achieve synergies mainly in terms of integrated business strategy under the common management, networks costs and investments, brand unity, as well as sales coverage. The ratings are tempered by the intense competitive landscape, mobile-fixed substitution which has rapidly eroded fixed-voice service revenues, and the company's shareholder distribution policy. KEY RATING DRIVERS Strong Market Position: TCH is the largest fixed-line service provider in Chile, and Fitch expects its strong market position to remain intact over the medium term backed by the company's continued high investments, especially in fiber, to maintain its network competitiveness. These factors help fend off competitive threats to an extent and support the company's solid cash flow generation and sound financial profile, which Fitch forecasts to remain commensurate with the current rating level over the medium term. As of March 2017, TCH retained leading market share of 41% in the fixed-voice segment, and the second-largest market shares of 35% and 21% in broadband and pay-TV, respectively, behind VTR Finance B.V.'s operating entities. Slow Growth; Margin Erosion: Fitch expects stagnant medium-term revenue growth due to ongoing voice revenue erosion, despite a higher level of revenue diversification into non-voice segments. During 1H17 TCH's revenues fell by 2% driven by 10% revenue drop in voice services, including long-distance service, which represented 29% of total sales. (34% in 1H16) This trend is unlikely to reverse going forward due to waning demand for fixed voice service given cheaper alternatives. TCH's EBITDA contraction is forecast to continue in the short to medium term due to competitive pressures. During 1H17, the company's EBITDA fell by 9% compared to 1H16, driven by lower prices by the operators, and increasing competition for pay-TV with the advent of the over-the-top services. Fitch expects any EBITDA recovery would be challenging over the medium term under the current market trend. Positively, TCH should be able to retain its solid market position over the medium term, given its capex plan to focus on increasing fiber network coverage to ensure competitive network quality against competitors. Less Reliant on Voice: TCH's subscriber growth in the broadband and pay-TV operations will continue to help somewhat mitigate ongoing contraction in traditional voice service revenues. A steady growth momentum for broadband and pay-TV industries in Chile continued during 1H17, with the company's subscribers in both segments increasing by 2%, compared with 1H16. Service penetrations of broadband and pay-TV are estimated to be just over 50%, which indicates further growth headroom over the medium term. These services enable the company to provide attractive bundled products, which helps lower churn rates. TCH's broadband and pay-TV revenues grew by 1% and 2%, respectively, during 1H17 compared with the same period a year ago, and accounted for 25% and 22% of total sales, respectively. High Capex; Neutral FCF: Fitch forecasts TCH's FCF generation to remain limited in 2017 and 2018, mainly due to continued high capex and dividends. Fitch expects the company's annual capex budget to average CLP170 billion in 2017 and 2018, mainly for network new builds and upgrades, which will consume most of its cash flow from operations (CFFO) during the period. These investments are crucial for the company's long-term growth strategy, which has increasingly become centered on data speed. Fitch expects the company's pre-dividend FCF will be mostly used for shareholder distribution. Sound Financial Profile: TCH's leverage is low for the rating category. Fitch expects the company's financial leverage to weaken in the short to medium term due to margin erosion amid suppressed revenue growth, but it is still expected to remain in line with the current rating level. Fitch forecasts TCH's adjusted net leverage to remain in the range of 1.0x-1.5x over the medium term. Equity Rating: Fitch affirmed the equity rating for TCH's series A and B shares at Level 4(cl), given the low level of free float and market presence due to the majority stake ownership by TMCH. This is mitigated by its solid solvency condition and long history in the stock market. DERIVATION SUMMARY TCH's 'BBB+' rating is well positioned relative to its regional peers on each major comparative. The company's leading market position, stable operational cash flow generation and solid leverage is deemed in line with Telefonica del Peru S.A.A., which is also rated 'BBB+'. TCH also boasts stronger financial profile compared with its domestic competitors, Entel, rated 'BBB', and VTR Finance, which owns telecom operating assets in Chile and is rated 'BB-'. A strong parent subsidiary linkage exists with its parent, Telefonica Moviles Chile given a high level of operational and financial integration under the common management. No Country Ceiling constraint and operating environment influence were in effect for these ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Revenue Contraction in 2017 and 2018: --EBITDAR margin in the range of 29%-30% in 2017 and 2018; --Capex-to-sales ratio to average 24% in 2017 and 2018, in line with 2016 level of 23%; --Neutral-to-negative FCF generation over the medium term; --Net leverage to increase to the range of 1.0x-1.5x over the medium term RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action An upgrade of TCH's ratings, resulting in more than one notch differential from Telefonica SA's 'BBB' rating, is unlikely given their strong linkage. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action Intense competition, unfavorable regulatory impact, and higher than expected capex and shareholder distributions, which combined would result in negative FCF generation and net leverage increasing to over 2x on a sustained basis, could lead to a negative rating action. Any further downgrade of Telefonica S.A., the parent of TMCH (BBB/Stable), would also be negative for TCH's ratings. LIQUIDITY TCH's liquidity profile is sound, backed by its readily-available-cash position of CLP82 billion, against its low short-term debt maturities of CLP7 billion as of June 30, 2017, and its relatively stable cash flow generation. The company's debt maturities are well diversified, and it does not face any significant bullet maturity until 2022 when its USD500 million notes become due. TCH has good access to capital markets, which further bolsters its strong liquidity position. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Telefonica Chile S.A. --Long-Term Foreign and Local Currency IDRs at 'BBB+'/Outlook Stable; --National long-term rating at 'AA(cl)'/Outlook Stable; --National short-term rating at 'N1+(cl)'; --Senior unsecured USD500 million notes due 2022 at 'BBB+'; --Local debt issuances at 'AA(cl)'. --National Equity Rating at 'Primera Clase Nivel 4'. Contact: 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 Joe Bormann, CFA Managing Director +1-312-368 3349 Summary of Financial Statement Adjustments: Net fair value of hedge derivatives were used to calculate the company's adjusted debt. In 2016, the company's net value of hedge derivatives was CLP120 million. Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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