|[December 04, 2013]
Fitch Affirms Telecel's IDR at 'BB'; Outlook Stable
RIO DE JANEIRO --(Business Wire)--
Fitch Ratings has affirmed Telefonica (News - Alert) Celular del Paraguay S.A.'s
(Telecel) ratings as follows:
--Foreign currency Issuer Default Rating (IDR) at 'BB';
--USD300 million senior unsecured notes due 2022 at 'BB'.
The Rating Outlook is Stable.
Telecel's ratings reflect its strong financial profile, underpinned by
low leverage, solid cash flow generation and extended debt maturity
schedule. The ratings also consider the company's leading market
position in mobile, broadband and Pay-TV services in Paraguay; strong
brand recognition; extensive network coverage; diverse service offering;
and low-to-moderate regulatory risk. Telecel's credit quality is
tempered by an increasingly competitive environment and capped by the
Paraguayan country ceiling rating at 'BB' due to limited geographic
The ratings factor in Telecel's relationship with its parent company
Millicom International Cellular (News - Alert) S.A. (MIC) (rated by Fitch at 'BB+',
Outlook Stable), which fully owns it. Telecel benefits from synergies
related to MIC's larger scale and management expertise, but the ratings
also consider Telecel's payment of management fees and high dividends to
the parent. Positively, MIC presents a solid consolidated financial
profile. For the last 12 months (LTM) ended Sept. 30, 2013, MIC had
USD5.1 billion in revenues, USD1.9 billion in EBITDAR, funds flow from
operations (FFO) of USD1.3 billion, indebtedness of USD4.2 billion and
cash balances of US1 billion.
Leverage to Remain Low
Telecel's net leverage is expected to remain at a low level, below 1.5x.
From 2008 to 2011, the company presented a positive net cash position,
which since 2012 turned into a very conservative net debt-to-EBITDA
ratio after the acquisition of Cablevision. The company is being able to
maintain conservative credit metrics despite substantial dividend
payouts in recent years. During the LTM ended Sept. 30, 2013, Telecel
reported a total debt-to-EBITDA ratio of 1x and a net debt-to-EBITDA
ratio of 0.7x, which already considers the cash payment of PGY767
billion in October 2012 for Cablevision.
Margins Better than Peers
Fitch expects EBITDA margins to trend downwards toward the 45%-50% level
in the medium term due to the consolidation of the lower margin Pay-TV
and broadband businesses, as well as the competitive environment and
potential regulatory changes. Telecel's EBITDA margin after fees paid to
MIC declined gradually to 50.4% in the LTM ended Sept. 2013 from 60.9%
in 2009, which still compares favorably with its peers in Latin America.
The company's net revenues have benefited from a growing customer base,
increasing value-added services participation, and, more recently, the
consolidation of Cablevision. In the LTM ended Sept. 30, 2013, net
revenues of PYG3,187 billion were 12.8% higher than in 2012. Following
the same increasing trend, EBITDA of PY1,606 billion was a record for
the company even with the margin dropping 440 basis points compared to
Fitch expects Telecel's free cash flow (FCF) to remain negative in the
next five years based on aggressive dividend payments to shareholders.
Annual capital expenditures should also increase between 2014 and 2017
as a result of growth opportunities. In the LTM ended Sept. 30, 2013,
cash flow from operations (CFFO) was PYG1,123 billion, with investments
of PYG324 billion and dividends of PYG1,058 billion leading to a
negative FCF of PYG259 billion.
Leading Market Position
Telecel's ratings are supported by its strong market position as the
main operator in the Paraguayan telecom sector. The company has
extensive network coverage in the country and a diverse service
offering. Telecel's market share in the mobile business is estimated at
58% and the company has strengthened its competitive position through
the acquisition of Cablevision in 2012, as it expanded the company's
product portfolio with Pay-TV and fixed-broadband and allowed some
synergies. The group is currently the market leader in both segments in
Paraguay, with 50% and 52% market share, respectively. The mobile
segment has lower room to grow customers than in the past as penetration
is around 97.2%. The market has four players and price competition is
aggressive, putting downward pressure on average revenue per user (ARPU).
Telecel has a manageable liquidity position, underpinned by its cash
balances, strong operational cash generation, and a lengthened debt
maturity profile. Fitch expects Telecel to maintain strong short-term
debt coverage ratios. As of Sept. 30, 2013, only 5% of total debt of
PYG1,637 billion matures in the short term (PYG86 billion). Cash and
marketable securities of PYG450 billion covers short-term debt by 5.2x
and (CFFO + cash and marketable securities)/short-term debt was 18.2x.
Telecel's consolidated debt comprised basically the USD300 million
senior notes due 2022 and the USD75 million European Investment Bank
(EIB) loan. Currency exposure is mitigated by low leverage, long-term
debt maturity profile and by 90% of the cash balance being kept in U.S.
Key Rating Drivers:
A negative rating action could be triggered by leveraged acquisitions, a
substantial increase in capital expenditures, or deteriorating cash flow
generation that results in a material change in the company's capital
structure. A multiple-notch downgrade on the parent company's (MIC) IDR
could also pressure the ratings. A positive rating action is constrained
by Paraguay's current country ceiling.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
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