Fitch Ratings has affirmed Empresa de Telecomunicaciones de Bogota S.A. E.S.P.’s (ETB) ratings as BBB- regarding Long-term foreign and local currency Issuer Default Ratings (IDRs). ETB has COP 530 billion senior notes due 2023 at ‘BBB-‘, and the agency has assigned a National long-term rating at ‘AAA(col)’.The Rating Outlook is Stable, according to Fitch.
According to Fitch, ETB’s ratings are driven by its conservative financial profile, characterized by its moderate leverage for the rating category albeit recent deterioration, as well as its entrenched position in the fixed-line service in Bogota. Conversely, the ratings are tempered by increasing competition, mobile substitution, limited diversification in geography and service revenues, as well as an aggressive investment plans over the medium term.
Fitch expects ETB’s financial leverage to increase over the medium term due to pressured EBITDA and negative free cash flow (FCF) generation amid increasing capex and rental expenses. The company plans to invest over COP 732 billion and COP 718 billion for capex in 2015 and 2016, respectively, to support fiber-to-the-home (FTTH) fixed-line network upgrades and to increase its fourth-generation (4G) mobile service penetration. With its EBITDA forecast to be around COP 450-470 billion during the period, which unfavorably compares to the average of COP 550 billion during 2012-2014, the investment plan could cause the company’s FCF generation to remain negative in 2015 and 2016.
In addition, ETB’s rental expenses should increase to about 8.5% of its revenue during 2015-2019, from the historical 7% level, due to the launch of the 4G mobile service in October 2014. The company has entered into an agreement with other telecom operators in Colombia to jointly develop and share the mobile network. With a higher rental expense, which Fitch incorporates as the adjusted off-balance-sheet debt, the company’s total debt amount is likely to reach close to COP 1.3 trillion by 2015. This, together with a reduced cash balance due to negative FCF, will raise the company’s financial net leverage, measured by EBITDAR to total adjusted net debt, to above 1.5x over the medium term from just 0.2x as of Dec. 31, 2014. Although this level of leverage would be considered moderate for the rating category, ETB would have only limited ratings headroom going forward given the ongoing deterioration of its financial performance amid weakening market share.
Average revenue per user (ARPU) deterioration is unlikely to be curbed in the short to medium term as intense competition remains centered on pricing for fixed-line bundling services, including pay-TV, amid a weakening economy. Fitch believes that ETB would need aggressive tariff policies to rapidly boost penetration of its FTTH network and migrate away from its copper network to achieve cost efficiencies, which in turn could further dampen ARPU growth. A slower than expected pace in this transition could also hinder any positive impact from the offering of a higher quality of service on its FTTH network in the next couple of years.
ETB’s weak ARPU trend amid its market share decline has resulted in tepid revenue growth in recent years. The company’s sales only grew by 0.2% in 2014 from a year ago due to the continued contraction in its core fixed-voice revenues and muted internet revenue growth. Special services, mainly including IT services and equipment rentals for corporate clients, and data segment grew strongly by 35% and 10%, respectively, from a year ago, but their combined revenue contribution proportion to total sales remained below 30% in 2014.
Profitability Deterioration Continues:
With weak results from its core operation, ETB’s profitability continued to be eroded with EBITDAR margin falling to 43% in 2014 from 48% in 2013. Fitch expects the margin to continue to decline to below 40% over the medium term as a result of intense competition, as well as an unfavorable change in the revenue mix with introduction of lower margin services, such as pay-TV.
In addition, any meaningful increase in ETB’s subscriber base, including its new mobile segment, could prove challenging absent a significant marketing efforts for subscriber acquisition. While the competitive landscape in the fixed-line segment in Bogota remains intense, the company is entering the already mature mobile market that is dominated by the established national operators. Should ETB pursue aggressive marketing policies to improve its market share, coupled with falling ARPU, a downward pressure on profitability and operational cash flow generation would continue over the medium term.
Strong Liquidity Position:
ETB’s liquidity profile is strong underpinned by its large cash balance and its long debt maturities. As of Dec. 31, 2014, the company held cash balance of COP 1,1 trillion, which comfortably covered the company’s total gross debt of COP 530 billion. ETB does not face any material debt maturity until 2023 when its COP530 billion notes become due.
- Mid-single digits annual revenue growth over the medium term;
- EBITDAR margin to fall to below 40% over the medium term due to competition and increased marketing expenses amid ARPU erosion;
- Operational leasing/rents estimated to be 8.5% of revenues over the medium term;
- Capex-to-sales ratio to peak at 49% and 40% in 2015 and 2016, respectively;
- Potential collection of the account receivables from Claro not reflected in Fitch’s base-case projection;
- Annual dividends of about COP 60 billion in 2015 and 2016 as per the company guidance.
Future developments that may, individually or collectively, lead to a negative rating action include:
–Inability by ETB to mitigate weak revenue growth and profitability deterioration, and/or debt-funded large investment resulting in its financial net leverage, measured by adjusted net debt to EBITDAR over 2x, on a sustained basis.
A positive rating action is unlikely at the moment given the increase in leverage and expectation of negative FCF over the next few years.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research:
–‘Corporate Rating Methodology’, May 28, 2014;
–‘Empresa de Telecomunicaciones de Bogota – Ratings Navigator ‘, Dec. 19, 2014.
Applicable Criteria and Related Research:
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage
Empresa de Telecomunicaciones de Bogota – Ratings Navigator