On the heels of an agreement that ended months of controversy surrounding the Colombian company’s future, Fitch Ratings upgraded its ratings for UNE EPM Telecomunicaciones S.A.’s (Tigo UNE) to B+.
Specifically, the big three rating agency upgraded both Tigo UNE’s Long-Term Foreign Currency Rating and Local Currency Issuer Default Ratings to B+ (from CCC) and set the rating outlook as “evolving.”
“The upgrades reflect Tigo UNE’s improved liquidity following the agreement by its two shareholders, Millicom and Empresas Publicas de Medellín (EPM), to jointly capitalize the company with each partner contributing 300 billion Colombia pesos,” said Fitch in its note to investors. “This equity injection, along with an agreement to rollover bank debt with Bancolombia, have allowed the company to greatly reduce its refinancing risk.”
Along with the upgrade, the New York-based agency offered the following key ratings drivers (quoted here in full):
Reduced refinancing risk
The announced agreement by Millicom and EPM to provide a timely equity injection have greatly reduced Tigo UNE’s refinancing risk, with this new cash used in part to repay the maturity of the COP150 billion note due October 20, while the company was able to rollover a bank loan with Bancolombia previously maturing in October. Tigo UNE is also obligated to make the initial payment on the renewal of its spectrum holdings in the 1900Mhz band in November 2023 and Fitch believes the company will have sufficient liquidity available to make this payment.
ESG – Governance
The dynamics between Tigo UNE’s shareholders, Millicom and EPM, resulted in the Ministry of Telecommunications interceding with the company’s shareholders to seek a solution to Tigo UNE’s liquidity problems. While Millicom and EPM were able to come to an agreement on the equity injection, uncertainty of conditions to avoid future disputes could result in potential further liquidity concerns.
Cash Flow Compression
Fitch expects Tigo UNE’s EBITDA margins to be constrained in the mid-20% range in the medium term as strong post-paid subscriber growth is offset by competitive pressures on average revenue per user (ARPU) in both post-paid mobile and fixed home. Fitch also expects the company to post protracted negative FCF over the rating horizon as continued large network investments, including spectrum costs, will likely lead to additional debt financing.
Fitch expects capital intensity to surpass 22% in 2023 and 27% in 2024, as the company faces renewals of its 40MHz in the 1900Mhz band and 30MHz in the AWS band. Deployment of 5G will add to the company’s investment needs over the coming years. Given these trends, Fitch expects the company’s leverage profile to gradually weaken from historical levels, with debt/EBTIDA and net debt/EBITDA near 2.1x and 1.9x, respectively, in 2023.
Intense Price Competition
Fitch expects the Colombian mobile market to continue to show significant pricing pressure as incumbent operators maintain promotional activity. Industry ARPU is likely to be particularly pressured in the post-paid segment as WOM Colombia S.A.S. seeks to become a significant player. The country’s mobile penetration, which is above 150% compared with 135% in 2019, is also contributing to lower ARPU. Competition is also growing in fixed broadband. Competitors Movistar and Claro have continued their aggressive promotional strategy to gain share to fill out network capacity as demand for broadband services has slowed post-pandemic.
Defending Market Position
Tigo UNE demonstrates relative strength in the fixed home segment, a strong spectrum position aligned with its coverage strategy, and a mobile network buildout with strong post-paid data user growth. Fitch believes these factors will help the company weather WOM Colombia’s entry into the country’s mobile market and aggressive promotional activity in the home segment from competitors Movistar and Claro.
Broad Service Offerings
The company’s service diversification compares well with other operators in the region. Tigo UNE is well-diversified across fixed, mobile, and B2B, with respective service revenue shares of approximately 38%, 39% and 20% during 2022. Tigo UNE operates entirely within the Colombian telecommunications market, which has continued to grow more competitive following the entry of WOM Colombia.
Parent Subsidiary Linkages
Fitch believes Tigo UNE has a weaker standalone credit profile compared to Millicom. Based on Fitch’s Linkage Factor Assessment, legal, strategic, and operational incentives are assessed as low, and accordingly no uplift is considered in Tigo UNE’s rating. The company’s ratings incorporate weak linkages with both Empresas Publicas de Medellin E.S.P. (EPM; BB+/Negative Watch) and Millicom International Cellular S.A. (BB+/Stable). The ratings of both entities are limited by sovereign risks, the first as a Colombian government related entity and the second by the majority of its cash flows from speculative grade countries. Although UNE EPM is structured as a 50/50 joint venture (JV), of the two parent entities, Millicom exerts greater influence.