Fitch Ratings Affirms Tigo Une’s Ratings at BBB with a Stable Outlook

New York-based credit rating agency Fitch Ratings has affirmed UNE EPM Telecomunicaciones S.A. ESP’s (Tigo Une) long-term foreign and local currency issuer default ratings (IDR) at BBB. The agency has also affirmed Tigo Une’s national long-term rating at AAA(col). The ratings outlook is stable.

In a statement, Fitch Ratings stated that its ratings for Colombia’s second-largest telecom operator (in terms of revenue market share) reflect the company’s “fully integrated operations and solid network competitiveness, which support its strong market position as the second largest service provider in terms of revenue in the competitive Colombian telecom sector.”

The company is rated one notch below Colombia’s dominant player Claro and regional market leaders Telefónica Moviles Chile S.A. (Movistar Chile) and Telefónica del Peru S.A.A. (both rated at BBB+ with a stable outlook). The difference is due to both market position and Tigo Une’s higher leverage rate.

But Fitch sees Tigo Une in a better position than, for example, Empresa Nacional de Telecomunicaciones (Entel) in Chile (rated BBB but with a negative outlook), Colombia’s ETB (BB+ with a negative), and Colombia Telecomunicaciones, which is branded as Telefónica Colombia (BB and stable).

In explaining its assessment, the agency noted that Tigo Une’s cash flow from operations (CFFO) is “well diversified into fixed, mobile and B2B services” and that it maintains a financial profile that is “solid for the rating category.” Also supporting the ratings and outlook are Tigo Une’s investment plans for network improvement and expansion, something Fitch believes will lead to more subscribers and help ensure that the firm’s financial profile remains stable.

In addition, the ratings and outlook reflect the company’s ties to Millicom International Cellular S.A. (MIC), which the agency rates at BB+ with a stable outlook. While Fitch considers this a parent/subsidiary relationship that could expose Tigo Une to dividend distributions, which would lower free cash flow, the agency expects that the telecom will be allowed to maintain the funds for needed investment in expansion as it operates in a market that has much room for growth in terms of penetration rate.

“Fitch does not expect this relationship to impair the company’s ability to execute its capex strategy while maintaining a credit profile in line with the current rating level,” said Fitch in a statement. “Tigo Une is one of MIC’s most important EBITDA contributors to the consolidated MIC group, highlighting its financial importance to the parent’s credit profile.”

(Among other shareholders, Empresas Publicas de Medellin E.S.P., or EPM, is a “significant minority shareholder with influence in the company’s operational and financial decisions,” says Fitch.)

Ultimately, Fitch sees Tigo Une as supported by a strong market position. In its assessment, the agency noted the following strengths:

• “Tigo Une is the second largest telecom operator in Colombia in terms of the revenue market share.”

• “The company has a diversified service portfolio with a nation-wide operational footprint with competitive HFC networks for the fixed business and 3G/4G networks for the mobile business.”

• “Tigo Une held the second and third subscriber market shares in fixed internet and mobile data, with market shares of 23.7% and 11.9%, respectively, as of March 2017.”

• “The company held the second TV market share position with 20% of subscribers during the same period.”

• “The company’s revenues reached 5.1 trillion pesos during fiscal-year 2016, representing the second largest in the industry behind América Móvil’s Claro with 11 trillion pesos in revenues.”

• “As of the latest 12 months through June 2017, operational service revenues (excluding handset sales and accounting for the disincorporation of UNE 4G Mobile operation) were flat when compared to the same period last year at 2.6 trillion pesos.”

• “Despite this muted revenue performance, Tigo Une posted a 28.2% EBITDA margin during this period, largely in line with 28.9% during the same period previous year, in part explained by operational efficiencies achieved through the aforementioned integration.”

Underlying all this, “Tigo Une’s solid performance has continued following its integration with Colombia Movil in 2014, and Fitch expects the trend to remain stable in the short to medium term despite competitive pressures and recent regulatory measures that impacted the mobile business segment,” stated the agency.

Subscriber growth in both household fixed and mobile business — which will account for nearly 65% of the Tigo Une’s revenues from 2017 through 2020, according to Fitch estimates — as well as B2B business should allow the telecom to continue “strengthening its competitive position.” The company forecasts a “stable” EBITDA margin of around 28% from 2017 through 2020.

This outlook is fortified by ongoing “high” investments in the Tigo Une network, which Fitch forecasts will amount to 3.6 trillion pesos, or 17.5% of projected revenues, in capital expenditure through 2020. While this is below the 18.7% that the company invested between 2013 to 2016, this will allow the company, in Fitch’s assessment, “to meet the expected demand growth for fixed services and to expand its mobile network, in line with its strategy to offer convergent services to cope with the competitive environment.”

In terms of leverage, the agency is forecasting Tigo Une to drop from the 2.6x gross debt-to-EBITDA ratio reported this June to 2.1x by 2019. “This is based on Fitch’s expectation that the company will maintain an adjusted debt level of approximately 3.8 trillion pesos and generate an average EBITDA of approximately 1.5 trillion pesos during 2017-2020,” stated Fitch.