Key Ratings for Tigo UNE Receive an Upgrade from Fitch Ratings, Outlook Set to Stable

New York-based credit ratings agency Fitch Ratings has upgraded its key ratings for UNE EPM Telecomunicaciones S.A. (Tigo UNE).

Specifically, the big three ratings agency upgraded Tigo UNE’s long-term national rating from to AA(col) from A-(col) and its short-term national rating to F1+(col) from F2(col). The long-term rating was also upgraded from “evolving” to “stable.”

Other ratings upgrades included a positive move for the telecom’s domestic public debt bond program rating to AA(col) from A-(col) and its commercial paper rating to F1+(col) from F2(col).

“The improvements in the ratings and the stabilization of the outlook reflect the strengthening in Tigo UNE’s liquidity, evidenced by the capitalizations made in 2023 by its two shareholders, Millicom International Cellular S.A. and Empresas Públicas de Medellín (EPM),” stated Fitch in a note.

The agency added that it also factored in “revenues from recent tower sales,” “the demonstrated ability to access bank debt financing,” “the company’s governance structure,” and a projected “improvement in Tigo UNE’s free cash flow generation over the rating horizon as a result of cost control initiatives.”

In it’s full breakdown of Tigo UNE’s ratings factors, Fitch Ratings also published the following details (included here directly as stated by the agency).

Improvement of the Liquidity Position

Tigo UNE’s liquidity was reinforced by capital injections from its shareholders in 2023. This support also allowed the company to take out a new bank loan with Bancolombia S.A. Additionally, in January 2024, the company announced an agreement to sell approximately 1,100 towers to Kohlberg Kravis Roberts & Co. (KKR) in a sale-lease transaction with revenue expected next year. Fitch expects the company to refinance its upcoming debt maturities using cash on hand and new bank debt or local bonds.

FFL Trends

Fitch projects that Tigo UNE’s FFL will remain negative in 2024 but gradually improve over the rating horizon as the company implements cost-cutting initiatives to improve EBITDA margins, while spectrum costs should be less of a hurdle as the company benefits from its shared network agreement with Movistar. Tigo UNE’s FFL was under pressure in 2023 due to high levels of spectrum-related capital expenditures (capex), the impact of higher interest expenses, and ongoing competitive challenges in the industry. This led to a liquidity crisis in the second half of 2023 that ultimately resulted in capital injections made by its shareholders.

Corporate Governance

The ratings remain limited by Tigo UNE’s shareholding structure, resulting in a one-notch spread with respect to the individual credit profile. While Millicom and EPM were able to reach an agreement on a capital injection, Fitch is of the opinion that the shareholding structure provides less financial flexibility than its peers due to a more time-consuming process required for financing needs.

Intense Price Competition

The Colombian mobile market is likely to continue to be highly competitive as operators maintain promotional activity to defend their market share. Fitch anticipates that average revenue per user (ARPU) industry will continue to be pressured in the postpaid segment as WOM Colombia S.A.S. (WOM Colombia) looks to become a significant player. The country’s mobile penetration, which exceeds 150% compared to 135% in 2019, is also contributing to lower ARPU. In addition, competition is growing in fixed broadband. Movistar has continued its aggressive promotional strategy to gain share and complete network capacity as demand has slowed after the coronavirus pandemic.

Effective position in the market

Tigo UNE demonstrates relative strength in the fixed residential segment, a solid spectrum position aligned with its coverage strategy and a mobile network development with strong growth in postpaid data users. Fitch believes these factors will help the company mitigate the effects of WOM Colombia’s entry into the country’s mobile market and aggressive promotional activity in the residential segment by its competitor Movistar.

Wide Range of Services

The company’s diversification of services compares well with that of other operators in the region. Tigo UNE is well diversified into home, mobile telephony and business-to-business (B2B) services, with service revenue shares of approximately 35%, 41% and 20%, respectively during 2023. Tigo UNE operates only in the Colombian telecommunications market.

Links between Matrices and Subidiaries

Fitch believes that Tigo UNE has a weaker PCI compared to Millicom. Based on Fitch’s linkage factor assessment, the legal, strategic, and operational incentives are assessed as low and, consequently, an increase in Tigo UNE’s rating is not considered. The company’s ratings incorporate weak ties to both EPM and Millicom. The ratings of both entities are limited by sovereign risks, the former as an entity related to the Colombian government and the latter by the majority of its cash flows from speculative-grade countries. While Tigo UNE is structured as a joint venture (JV) 50/50, of the two parent entities, Millicom exerts greater influence.