|[January 09, 2013]
Fitch Expects to Rate Empresa de Telecomunicaciones de Bogota's Proposed Notes 'BBB-(exp)'
MONTERREY, Mexico --(Business Wire)--
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
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 lcal 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
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
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
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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