CHICAGO—(Business Wire)–Fitch Ratings has affirmed the long-term foreign and local currency Issuer Default Ratings (IDRs) of Millicom International Cellular, S.A. (Millicom) (STO:MIC-SDB) at ‘BB+’ with a Stable Outlook. Fitch has also affirmed Millicom’s senior unsecured debt at ‘BB+.’
Millicom’s ratings reflect the company’s geographical diversification, strong brand recognition and network quality, all of which have contributed to its leading market positions in key markets, steady subscriber growth, and solid operational cash flow generation. In addition, the rapid uptake in subscribers’ data usage, as well as Millicom’s ongoing expansion into the under-penetrated fixed-line services bode well for its medium- to long-term revenue growth.
Despite these diversification benefits, Millicom’s ratings are constrained by the company’s presence in countries in Latin America and Africa with low sovereign ratings. The ratings are also tempered by the recent increase in the company’s financial leverage due to M&A activities, historically high shareholder returns, and debt allocation between subsidiaries and the holding company.
While operational fundamentals and key financial metrics are stable, the ongoing investigation regarding the improper payment on behalf of Tigo Guatemala is credit negative. The timeline or the magnitude of the potential impact stemming from this issue remains largely uncertain at this time. Fitch will closely monitor the situation and take immediate action, if necessary, when details become available.
KEY RATING DRIVERS
Leading Market Positions:
Millicom has retained its market leadership in most of its key cash-generating operating companies in Latin America and we expect these positions to remain intact over the medium term backed by its extensive network quality, strong service quality and brand recognition. The company has maintained a steady subscriber base expansion, which was 7% during the first nine months of 2015 (9M15) compared to the level at end-2014, and its increasing investment into fixed-line operation will help acquire more revenue-generating units going forward. As of September 2015, Millicom maintained its largest market positions in its key cash-generating mobile markets, such as Guatemala, Paraguay, and Honduras.
Millicom has achieved a stable revenue and EBITDA improvement during 9M15, driven by continued subscriber expansion, solid growth in its fixed-line operation, and the improved cost structure. On a constant currency basis, the company has achieved service revenue growth of about 6% during 9M15 while improving its EBITDA margin to 33.4% from 32.7% during the same period, backed by its efforts to rein in marketing and holding company corporate costs. Excluding the currency impact, Fitch estimates that the company’s EBITDA has grown by close to 10% during the period, which is a noticeable improvement compared to its consistent EBITDA margin erosion until 2014 due to competitive pressures.
Ongoing FX Headwind:
Millicom’s recent solid performance has been largely diluted by the ongoing local currency depreciation against the U.S. dollar, the reporting currency of the company. During the 3Q15, the average local currency depreciation in the company’s operational geographies was 13.5% compared to a year ago, with the largest impact seen in Colombia with 52% and Paraguay with 23% among the key subsidiaries. As a result, its reported revenues fell by 1.3% during 9M15, while EBITDA generation managed to grow by just 0.8%.
Currency mismatch is also high for Millicom with regard to its debt structure, as 75% of its total debt is denominated in US Dollars (USD) while its cash flow generation is predominantly based in local currency. Positively, we believe that this risk is manageable, as the company has stable cash flow generation without any sizable USD bond maturities until 2020, while its access to international capital markets have historically been solid.
Diversifying Revenue Mix:
Millicom’s growth strategy will be increasingly centered on mobile data, fixed internet and pay-TV services as it tries to alleviate pressure on the traditional voice/SMS revenues. The mobile data customer base reached 29% of total subscribers as of Sept. 30, 2015, from 20% as of end-2013, which supported 25% mobile data revenue growth during 9M15, compared to a year ago. Broadband and pay-TV businesses also maintained solid growth, largely due to UNE EPM Telecomunicaciones S.A. in Medellín, as the segmental revenues grew by 116% during the same period. As this trend continues, Fitch forecasts mobile service revenues to continue to fall well below 65% of total revenues over the medium term, which compares to 83% in 2013.
The company’s leverage has increased in recent years due to M&A activities, mainly the merger in August 2014 between its Colombian subsidiary and UNE, the Colombian fixed-line operator, and historically high shareholder distributions. The company’s net leverage, measured by adjusted net debt-to-EBITDAR including minority shareholder dividend, was 2.5x as of Sept. 30, 2015; this compares unfavorably to 1.4x at end-2012. On a proportionate consolidation basis, the net leverage ratio was 2.3x during the same period.
Positively, Fitch forecasts Millicom’s leverage to gradually fall over the medium term as the company continues to refrain from aggressive shareholder payouts amid EBITDA improvement. The company paid only $264 million USD (all quoted $ amounts in this article are US Dollar denominated) in dividends annually in 2013 and 2014, which was a sharp reduction from $731 million including share repurchase in 2012 and $991 million in 2011. In addition, CAPEX should remain relatively flat at around $1.3 billion over the medium term, representing about 18% of revenues, which is a decline from 22.5% in 2013. These will lead to neutral to modest positive free cash flow (FCF) generation and help the company reduce its leverage moderately over the medium term, barring any material financial impact from the ongoing legal investigation.
Concentration in Low-Rated Sovereigns:
Despite the diversification benefit, Millicom’s ratings are tempered by its operational footprint in countries in Latin America and Africa with low sovereign ratings and GDP per capita. The operational environment in these regions, in terms of political and regulatory stability and economic conditions, tend to be more volatile than developed markets, which could have an adverse effect on Millicom’s operations. This also adds currency mismatch risk as 75% of Millicom’s total debt was based on US Dollars while most of its cash flows are generated in local currencies in each country.
–Mid-single-digit annual revenue growth over the medium term;
–Cable & Digital Media segment to grow to well over 25% of consolidated revenues over the medium term, compared to 16% in 2013, largely due to UNE consolidation;
–EBITDA margin to remain stable at around 30%-31% range in 2016, reflecting the minority dividend payment;
–Annual CAPEX to remain at about $1.3 billion over the medium term in line with the 2014 level;
–No significant increase in shareholder distributions in the short- to medium-term with annual dividend payments remaining at $264 million.
Negative rating action can be considered in case of an increase in net leverage to 3.0x without a clear path to deleveraging due to any one or combination of the following: sustained negative free cash flow generation due to competitive/regulatory pressures amidst market maturity, sizable M&A activities, and aggressive shareholder distributions.
Also, any potential material financial impact from the ongoing investigation regarding the improper payment on behalf of its joint venture operation in Tigo Guatemala would pressure the ratings.
In Fitch’s analysis for Millicom’s financial profile, the group’s proportionately consolidated key financial metrics and the amount and the geographical breakdown of the upstream cash flow income from its subsidiaries will remain key considerations.
Positive rating action in the short- to medium-term is unlikely given the company’s higher leverage level than the past, its operational concentration in low-rated countries, and the ongoing investigation.
A positive rating action could be considered in case of a material improvement in diversification of cash flow generations, mainly from investment-grade-rated countries, and stronger market positions and stable positive free cash flow generation leading to consistent recovery in its leverage.
Millicom’s liquidity profile is good given its large cash position, which fully covered the short-term debt as well as its well-spread debt maturities with an average life of 5.6 years. As of Sept. 30, 2015, the consolidated group’s readily available cash was $724 million, which compares to its short-term debt of $191 million. Fitch does not foresee any liquidity problem for both the operating companies and the holding company given operating companies’ stable cash generation and their consistent cash upstream to the holding company.
In addition, Millicom has a $500 million undrawn credit facility which further bolsters its liquidity. Millicom also has a good track record in terms of its access to capital markets when in need of external financing, which supports its liquidity management.