Fitch Ratings has affirmed Empresa de Telecomunicaciones de Bogota S.A.’s (ETB) Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) at ‘BB+’ with a stable rating outlook. The rating affirmation reflects ETB’s positive EBITDA performance as a result of a continued successful cost control strategy in the context of a 3.4% contraction of operational revenue growth during 2018.
The EBITDA performance and lower than anticipated capex expenditures during the period reduced financing needs, which allowed ETB to maintain an adjusted leverage metric of 1.9x as of December 2018, below the leverage negative rating trigger of 2.5x for its ‘BB+’ rating category.
Fitch will continue to monitor ETB’s ability to improve its EBITDA performance through the reduction of its operational costs. ETB’s credit profile reflects a strong asset based fixed operation concentrated in the city of Bogota, with a revenue structure concentrated mainly in its home business (49.2%) and B2B (42.3%), with the remaining 8% coming from its relatively weak mobile operation.
ETB’s ratings are constrained by its limited geographic diversification in its home business and a 28% up take on its FTTH network penetration as of December 2018 that could limit the company’s ability to achieve meaningful revenue and EBITDA growth in the short to medium term; especially as its copper legacy service revenue continues to contract following shifting consumer preferences for data consumption, connectivity and convergence.
Fitch has affirmed the following: Empresa de Telecomunicaciones de Bogota S.A. E.S.P.
- Long-Term Foreign Currency IDR at ‘BB+’; Outlook Stable
- Long-Term Local Currency IDR at ‘BB+’; Outlook Stable
- COP530 billion senior notes due 2023 at ‘BB+’
- National Long-Term Rating at ‘AA+(col)’; Outlook Stable
Key Rating Drivers:
Competitive Position under Pressure: Fitch expects the company’s competitive position to remain under pressure as Colombian integrated telecom operators grow their market shares and subscriber base, while ETB continues to lose customers on its legacy copper network amid slow subscriber growth (16%) on its fiber networks. During 2018, Claro surpassed ETB as the leading fixed voice and internet provider in Bogota. As of June 30, 2018, ETB’s market shares for LIS and internet declined by 3.8 percentage points and 1.2 percentage points respectively, while Claro strengthened its clear leadership position. Fitch believes ETB’s continuing underperformance in the penetration and uptake of its FTTH network compared to the ratings agency’s previous 2018 forecast could lead to a weakening of its competitive position, considering the average churn of 2.5% experienced in 2017 – 2018 on its copper internet based subs.
Cost Efficiencies Benefit EBITDA: During 2018, ETB’s EBITDA was supported by a reduction in operational expenses combined with marginal revenue increase and credit loss provision adjustments, which led to margin expansion. Although the company’s recent profitability improvement is positive, it has been driven primarily by the realization of cost efficiencies, which in Fitch’s opinion will be difficult to sustain over time, especially as the company resumes its commercial capex execution and associated opex to support revenue growth. Fitch projects in its base case, that ETB will post an average EBITDA margin close to 27% in 2019 – 2022, according to Fitch’s calculation methodology.
Reduced Capex Execution: ETB has redefined its subscriber growth strategy based on a lower projected average capex intensity of 22% of projected revenues in 2018 – 2022. The new capex strategy focuses on promoting double play bundles over triple play bundles both on its FTTC and FTTH deployments, which in Fitch’s opinion, will slow the pace at which it diversifies its revenue structure away from traditional copper services to higher ARPU fiber services and simultaneously reduces the projected capex outlay in support of higher cash preservation for general corporate purposes. The reduced commercial capex execution led to a lower network penetration compared to 2018 forecast, and responded to a 2.2% home operational revenue contraction, including a 2.2% contraction in Home revenues experienced during 2018.
Going forward, Fitch believes ETB may find it difficult to meet its adjusted network penetration target amid expected low single digit revenue growth for 2019 – 2022, which may again lead to the company’s underperforming on its projected commercial capital investments during the projection period. Fitch remains cautious about the company’s ability to materially improve its revenue base in the medium term and instead projects a revenue growth close to 1% during the projection period.
Negative to Neutral FCF: Fitch’s base case projects average CFFO of COP315 billion per year in 2019 – 2022 vis a vis average capex expenditure of COP 330 billion during the same period, resulting in an average free cash flow margin of -1% without pressuring the company’s liquidity.
Low Leverage: ETB’s EBITDA improvement, along with its relatively low capex execution during 2018, reduced its financing needs and allowed the company to maintain its gross and net adjusted leverage at 1.9x and 1.3x, both by December 2018. Fitch expects the adjusted EBITDAR leverage metric to remain close to 1.8x during 2019-2022, below the trigger for a negative rating action of 2.5x at the current rating level.
ETB is rated at the same level as ColTel (BB+/Outlook Stable), a more diversified Telco, with a growing fixed operation and a strong mobile foot print in Colombia, but that exhibits a more levered capital structure (2.6x) than ETB’s (1.9x). ETB is also rated at the same level as Comcel Trust (BB+/ Outlook Stable) a mobile operator focused on Guatemala that exhibits a strong competitive position and low leverage (1.5x). ETB is rated two notches above TalkTalk (TT), a UK based broadband service provider with a less profitable business model (20% EBITDAR) and weaker technology portfolio, which have led to deterioration in the company’s leverage structure. ETB is rated on a standalone basis, as any recurring support from the District of Bogota (BBB/ Stable), its controlling shareholder, is unlikely. Fitch views the district’s 2017 decision to restructure ETB’s dividend liability into a 10-year obligation with a two-year grace period as an extraordinary support of the company’s cash position, which is not likely to reoccur in the future. No Country Ceiling and/or operating environment constraint were in effect for these ratings.
Fitch’s Key Assumptions Within Its Rating Case for the Issuer –Total and Operating Revenues grow at 0.4% and 0.7% average per year in 2019 to 2022; –Adjusted gross and net debt is forecast at 1.8x and 1.2x during the projection period.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
A positive rating action is unlikely given the difficulty faced by the company to achieve meaningful revenue growth in the short to medium term, which will continue to constrain CFFO performance.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Muted revenue growth due to a slower-than-expected subscriber growth in non-traditional services amid continued material revenue erosion in copper-based services;
- Market share contraction on its main home services to the detriment of its competitive position;
- Negative FCF generation with a low cash balance on a sustained basis;
- Profitability deterioration with the adjusted leverage increasing to 2.5x on a sustained basis.
ETB’s liquidity profile improved in 2018 as available cash balances increased to COP 400 billion by December 2018 (above the 2017 balance of COP 248 billion) with zero short-term debt. ETB does not face any material debt maturity until 2023 when its COP530 billion notes become due. ETB reported non committed lines of credit of COP 387 billion available as of December 2018, 74% of which were short term, further bolstering its liquidity position.