MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed Empresa de Telecomunicaciones de Bogota, S.A., E.S.P. (ETB)'s foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-. The Rating Outlook is Stable.
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. The ratings take into account ETB's 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 annual negative to neutral 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 70% of lines in service in Bogota, 43% of broad band access 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 company.
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 strengthen its competitive position by investing over the next six years 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 local fixed telephony and long distance revenues through 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 to decline during the next years due to competitive pressures and changes in revenues mix, as newer services are introduced.
Fitch expects forthcoming years' capital expenditure plan to be funded mainly with cash flow from operations and potential additional indebtedness, which will result in negative FCF generation. The company has some flexibility in its 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 it to fund its investments and maintain a conservative financial profile. Over the past few years, the company's cash flow from operations (CFFO) generation has been strong and has covered the company's Capex and dividends, resulting in a positive free cash flow (FCF) generation.
The rating considers 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 maintained a downward trend in recent years and ETB's decision to fully fund its pensions and take this obligation out of its balance sheet allows it to partially offset the expected increase in debt without a significant deterioration in its credit profile. For the 12 months ended Sept. 30, 2012, both FFO adjusted leverage and debt to EBITDA were 0.4 times (x). By adjusting the debt for contingencies, lease of satellite frequencies, unfunded pension liabilities and guarantees to Colombia Movil result in an adjusted leverage ratio of 1.3x EBIDTAR.
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, which should turn neutral to negative in the next few years as the company increases capital expenditures. As of Sept. 30, 2012 cash balances amounted to COP539.4 billion, which positively balance against ETB's total debt of COP277.0 billion.
What Could Trigger a Rating Action?
A positive rating action is unlikely at the moment given the increase in leverage and expectations 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 generation 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:
--'National Ratings Criteria', Jan. 19, 2011;
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 9, 2012;
--'Corporate Sector Credit Factor Guidelines - All Sectors 2012', Nov. 23, 2012.
Applicable Criteria and Related Research:
National Ratings Criteria
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Corporate Sector Credit Factor Guidelines - All Sectors 2012