UNE EPM Telecomunicaciones S.A. is currently undergoing a period of economic recovery and stabilization, prompting discussions about the initiation of the sale process. Meanwhile, EPM has sufficient time to exercise its exit rights as specified in the Shareholders’ Agreement, indicating a strategic move in response to the current market conditions.

On August 21, 2024, the Council of Medellín approved, in second debate, by 16 votes in favor and 5 against, the sale of EPM’s non-controlling shareholding in UNE EPM Telecomunicaciones S.A. (UNE) and Inversiones Telco S.A.S (Invertelco).

What’s next in the process of alienation

Following the approval of the Disposal Program by the board of directors and the setting of the sale price of the shares, EPM will move forward with the temporary registration of the shares of UNE EPM Telecomunicaciones S.A. (UNE) in the National Registry of Issuers and Securities and, after that, will execute the sale process, as established in Law 226 of 1995. Like this:

First stage: the shares will be offered at the price set by the board of directors to the recipients of special conditions, among whom are the company’s active and retired workers, associations of employees or former employees, workers’ unions, employee funds, severance, and pension funds and cooperative entities, among others, from the list contained in Article 3 of the same Law 226.

This stage is expected to take place during the last quarter of 2025, and the recipients of special conditions will have a period of two months, from the launch of the offer, to submit their acceptances.

If not all the shares are sold in the first stage, the remaining shares may be offered to the public during the next stage.

Second stage: the actions will be available to the public. Any natural and/or legal person who meets the conditions established in the regulations of this stage may participate in this stage. Its execution is projected for the first months of 2026.

EPM says that it will in due course publish the regulations that will detail the conditions of each stage, the respective notices with which each of them begins, in addition to the relevant information that may have an impact on the sale process.

Subsequent stages

If the sale of EPM’s shares is not achieved in the two stages described above, the shareholders’ agreement and the bylaws of UNE EPM Telecomunicaciones S.A. (UNE) establish a right of first refusal for the controlling shareholders. With this, Millicom has the possibility of directly acquiring EPM’s shares in the company.

If Millicom does not make use of this right of pre-emption as a controlling shareholder, EPM could subsequently link it to the sale and jointly offer the entire shareholding held by both shareholders in UNE EPM Telecomunicaciones S.A. (UNE). This is possible thanks to the clause for the protection of public assets that is in force until December 31, 2026.

Federico Gutiérrez Zuluaga, mayor of Medellín, and John Maya Salazar, general manager of EPM. Photo credit: EPM.

Colombia’s mobile market is the most saturated in the Andean region, with over 82 million mobile lines as of 1Q23. The competitive environment has intensified in recent years, spurred by new entrants such as WOM Colombia, as well as high levels of capex related to the renewal of spectrum and network modernization. Examples of the latter include fiber investments and transition spending related to the move to fifth-generation (5G) technology in the coming years from 4G.
Within this rapidly evolving environment where mobile penetration is high, companies are trying to maximize their 4G network by offering bundle services but post-paid subscriber growth is offset by competitive pressures on ARPUs.
Fitch expects already depressed industry cash flows to be pressured as a result of spectrum license renewals. During 2023-2024, Colombia’s four main operators face renewal processes of their spectrum holdings and need to financially prepare for the upcoming 5G spectrum auctions adding more uncertainty about capex allocation.

5G mobile network technology will enable significantly faster data speeds compared to existing cable or ADSL, low latency, and greater capacity. It will also allow for new applications and services in various industries, such as healthcare, transportation and manufacturing. The share of smartphone subscribers reached half of the Colombian market in 2022 driven by the increased availability of low-cost options, as well as lower pricing of voice and data services.

In the Colombian broadband market, Fiber to the home’s (FTTH) deployment is gaining traction, especially in urban areas, as it offers faster speed compared to traditional cable (copper or ADSL) and more reliable internet connections, supporting the increasing demand for data-intensive applications. Telecom providers, including Coltel and Tigo in Colombia, are expanding their FTTH infrastructure to offer higher-speed internet services and capitalize on the growing digital needs of consumers and businesses.

Capitalizing on new technologies are key for future growth; however, the ultimate roll-out cost and investment payback periods remain uncertain due to the weak consumer environment and affordability’s issues for these technologies. Companies are trying to offset the upfront costs by transitioning to less capital-intensive business models; however, the change will take time.

Some actions taken, or under consideration, to move to capital-light operating models include selling and leasing backs passive assets and partially divesting fixed infrastructure. Another example includes entering into partnerships, such as Tigo and Coltel’s recent efforts to explore the possibility of sharing their mobile networks and other network resources. The definitive agreement is subject to approval by the relevant governmental authorities.

The downgrade of Ecopetrol’s, OCENSA’s and A.I. Candelaria’s foreign currency (FC) and local currency (LC) Issuer Default Ratings (IDRs) reflects the direct and indirect linkage of these companies to the sovereign rating of Colombia, which Fitch downgraded last week to ‘BB+’ from ‘BBB-‘ with a Stable Outlook.

The downgrade of Isagen and TIGO UNE’s FC IDRs reflects the cap imposed by the country ceiling of Colombia (‘BBB-‘), as these companies do not have substantial assets, offshore credit facilities, or cash held or generated abroad to reduce transfer and convertibility risk. Fitch affirmed their LC IDRs, which remain one notch above Colombia’s country ceiling. The downgrade of ISA’s FC and LC IDRs reflect its linkage with the Republic of Colombia, which owns 51.4% of the company. Fitch considers ISA’s two-notch differential above its parent appropriate.

Statement from Fitch Ratings reprinted as a courtesy to our readers.

Key Rating Drivers

The sovereign downgrade reflects the deterioration of the public finances with large fiscal deficits in 2020-2022, a rising government debt level, and reduced confidence around the capacity of the government to credibly place debt on a downward path in the coming years. Colombia’s gross general government debt (GGGD) to GDP is forecast to reach 60.8% in 2021, more than double the 30% level when Fitch upgraded Colombia back to the ‘BBB’ category in 2011. Fitch expects debt to continue to rise through 2022 and does not expect significant debt reduction over the medium term, leaving Colombia vulnerable to shocks. Fitch sees significant risks to the government’s fiscal consolidation plan, given the reliance on tax administration efforts and divestments, as well as the uncertainty of the impact of the pending tax reform.

Rating Sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

• Public Finances: Achieving sustained primary fiscal balances consistent with a steadily declining GGGD to GDP ratio that enhances fiscal policy credibility;
• Macro: Higher sustained medium-term economic growth above Colombia’s historical averages of about 3.5%;
• Structural: Steady improvement in governance indicators that leads to improved social cohesion and reform momentum, improving Colombia’s structural fiscal position as well as medium term growth prospects.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

• Public Finances: A failure to achieve fiscal consolidation that leads to a significant deterioration in Colombia’s general government debt to GDP ratio relative to the ‘BB’ peer median;
• Macro: Diminished medium-term growth prospects well below Colombia’s historical potential of 3.5%, leading to continued high unemployment and poverty levels with social ramifications;
• External Finances: Sharp further increase in net external debt to GDP, raising external vulnerabilities.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579 .

The rating actions are linked to the recent downgrade of Colombia’s sovereign and the corresponding Country Ceiling.

ESG CONSIDERATIONS

Ecopetrol has an ESG Relevance Score of ‘4’ for Exposure to Social Impacts due to multiple attacks to its pipelines, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Ecopetrol has ESG Relevance Score of ‘4’ for Governance Structure, due to its nature as a majority government-owned entity and the inherent governance risk that arise with a dominant state shareholder. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

The letter of resignation came just hours after a contentious press conference where Calderón wished to discuss his investment plan for the utility operator, but the press, including Finance Colombia, wished to delve into the numerous gaps and inconsistencies in his qualifications, including:

• He was presented in writing as having a Harvard MBA and degree from The University of California, Santa Barbara—He has neither, but does seem to have a Master of Liberal Arts from the Harvard Extension School.
• His resumé lists his work from 2016-2020 at a firm “C&C Gold” that he founded and owns and has a value according to records Calderón filed of $16,000 USD. During the press conference he stated that the company was inactive, begging the question as to why it was listed as his employment for four years, and if so, what were his activities.
• Other journalists brought up his alleged involvement with entities entangled with the Mossack-Fonseca “Panama Papers” scandal, and whether he was appointed out of personal loyalty to embattled Mayor Daniel Quintero, who is facing a recall campaign in Medellín.
• Finance Colombia’s questions were not answered during the press conference. Afterwards they were re-submitted to EPM. Those questions, now moot, were:
  • What is the largest team of direct reports (hire/fire authority) that Mr. Calderón managed up to this point in his career? (What function, what company?)
  • What is the largest P&L Mr. Calderón has been operationally responsible for—As a manager or executive, not as board member or advisor?
  • If C&C Gold (his company from 2016-2020) was an investment bank as he stated, what is the most outstanding merger, acquisition or capital raise that the firm can take credit for during that time period?
• Meanwhile, opposition Colombian senators leaked damning documents from the headhunting process where Mayor Quintero sought to appoint Calderón as auditor in Tigo UNE, the telecommunications company co-owned by EPM and global telecommunications giant Millicom. In the document, the executive search “headhunters” evaluated Calderon, citing his personal friendship with Mayor Quintero, that he sought to be the mayor’s “eyes and ears” inside of Tigo UNE, but he was not remotely qualified for the position as auditor. The headhunters also indicate that no, Calderón does not have an MBA from Harvard—as EPM later stated in a written communication, nor adequate experience for such an executive position as vice president, much less CEO. Finance Colombia was able to indeed confirm the veracity of the leaked documents.

Marcelo Cataldo, presidente de Tigo Une, pone a disposición del headhunter Carlos Rodríguez, la hoja de vida de Alejandro Calderón Chatet. pic.twitter.com/AcQYQLd0Nl

— Santiago Valencia G. (@sanvalgo) April 12, 2021

Since Quintero took his place at Medellín’s city hall, EPM, a multibillion-dollar corporation with operations from Mexico in the north to Chile in the south, has been plunged into scandal and crisis. The company which is supposed to operate independently according to a governance agreement, has billions of dollars of bonds in public debt markets, and its own rating, even though it is owned by the city of Medellín.

Timeline

1. December 2019 — Former CEO Jorge Londoño Resigned days before Quintero assumed office. Quintero publicly insulted Londoño during Quintero’s mayoral campaign, and Londoño didn’t want to be around to hand the baton to whoever the new CEO would be.
2. January 2020 — Mayor Quintero appoints Álvaro Guillermo Rendón Lopez as new CEO of EPM.
3. August 2020 — EPM’s entire board of directors resigns, except for the mayor himself, accusing Quintero of precipitating a collapse in corporate governance
4. August 2020 — EPM’s representative to the board of directors of Tigo UNE resigns in protest of the mayor’s governance and politicization of the entities.
5. August 2020 — Ratings firm Fitch downgrades EPM, citing a “deterioration of corporate governance.
6. August 2020 — Several financial entities with credit exposure to EPM suspend commercial relations with EPM, as revealed in a filing submitted by EPM to the Colombian government.
7. August 2020 — SINPRO, EPM’s largest labor union, holds a protest at EPM headquarters, and demands explanations for the CEO’s private gym despite the COVID pandemic, lease of an office complex in Bogotá, despite EPM being headquartered in Medellín. See Finance Colombia’s interview with SINPRO President Olga Lucia Arango here.
8. August 2020 — EPM announces a new board of directors, hand-picked by Mayor Daniel Quintero. The new board includes preschool teachers, politicians & attorneys, but is notably light on governance experience in large issuers of corporate debt like EPM.
9. January 2021 — At Mayor Quintero’s direction, EPM took legal action against the consortium of contractors building EPM’s Hidroituango hydroelectric project. Quintero moved several months earlier to initiate mandatory mediation. When those collapsed in January, Quintero instructed EPM to launch lawsuits against the consortium CCC Ituango, comprising Coninsa-Ramón H, Conconcreto, and Brazilian firm Camargo Correa.  Additional parties to the conflict include insurers Mapfre, Chubb, and Sura.
10. February 2021 — A conflict that has been simmering behind the scenes between Mayor Daniel Quintero and his own appointed EPM CEO, Álvaro Rendón becomes public, with the CEO of EPM daring Quintero to fire him, and accusing him of attempting a personal takeover of the utility, appointing friends and personal representatives, though EPM is expected to be independent and professionally managed.
11. February 2021 — EPM’s board of directors, installed by Quintero, fires Álvaro Rendón
12. February 2021 — Former CEO Álvaro Rendón denounces Mayor Quintero as a menace to EPM’s corporate governance and independence.
13. February 2021 — SINPRO, EPM’s largest labor union, warns the battles between Medellín’s Mayor Quintero and former CEO Álvaro Rendón are jeopardizing the health and stability of the conglomerate.
14. March 2021 – Rendón deposes Quintero: Colombia’s 18^thCivil Circuit Court of Medellin accepts a motion for evidence requested by former EPM CEO Älvaro Guillermo Rendón associated with a possible lawsuit, that requires a written deposition by Medellín Mayor Daniel Quintero.
15. April 2021 — Daniel Quintero via Twitter, & EPM via press release, announce Alejandro Calderón Chatet as the new CEO of EPM. In its announcement of the appointment, EPM clearly states (in Spanish) that Calderón is an economist with a specialization in business administration and economics from the University of California (it does not say which), and a masters in business administration (MBA) with an emphasis in finance from Harvard University. Both statements would later be revealed as false. Finance Colombia in its initial reporting, left out Calderon’s listed educational qualifications, because they seemed suspect.
16. April 2021 — Calderón holds a press conference with the media, while both the mayor and EPM send out statements in support of Calderon. Colombian media questioned Calderón’s qualifications, educational background, career, and connections with people implicated in the Mossack Fonseca “Panama Papers” scandal. Finance Colombia submitted questions, but they were not addressed during the press conference. Meanwhile, documents are leaked that show the headhunting firm that considered Calderón for a lesser position at EPM affiliate Tigo UNE rated him as significantly underqualified for the role.
17. April 2021 — The night of April 12, just hours after the press conference, Calderón submits a letter of resignation to Mayor Daniel Quintero.

EPM is now without a permanent CEO, facing lawsuits along with the challenges of finishing and bringing the mammoth multibillion-dollar Hidroituango hydroelectric dam online before facing a multimillion-dollar penalty for breach of electrical supply commitments, and facing the lawsuits of the very contractors building the dam, along with absorbing its recent purchase of the electrical utility for Cartagena and the surrounding regions. The Electricaribe purchase (now called Afinia) was organized by the Colombian government because the coastal provider, owned previously by Spanish utility Fenosa, literally “could not keep the lights on” and now faces significant capital investment and operational overhaul to bring local electrical service up to OECD and even Colombian local standards.

As if these challenges were not enough, Mayor Quintero himself is facing a recall election that was organized less than a year into his term as mayor of Medellín. He has somehow managed to unite labor and Medellin’s corporate leaders…against his leadership. The drama of the past 16 months has left EPM in a precarious position, struggling to maintain its managerial independence, corporate governance, and international creditworthiness.

Quintero’s appointment of Calderón in the first place, speaks loudly-in a very negative way, about Quintero’s own judgement or ability to govern effectively. Will Mayor Quintero and his board back off and seek professional, independent  management, or will they double down in their attempt to convert EPM into a tool of political loyalty? Will a professional CEO with the experience that EPM requires, even be willing to step into a politically charged dumpster fire? The next two months will be critical for the utility’s future.

Since his inauguration, Finance Colombia has, through his press secretary, offered numerous occasions to Mayor Quintero to interview, or even respond with comments to written questions. The mayor’s office has chosen not to engage.

Here in Colombia, Cartagena has had a notoriously corrupt city administration. Newly elected Mayor William Dau was voted in on an anti-corruption platform and has quickly made some very powerful enemies taking on criminal structures. Bogotá’s political/civic culture can be described as “battle royale” where it is everyone against everyone: Private sector vs. public sector, north side vs. south side; each new administration seems to try to undo and reverse everything that was done before. Many remember former mayor and now Senator Gustavo Petro’s garbage fiasco where trash piled up on the streets of Bogotá in 2012 as Petro unilaterally canceled contracts with sanitation contractors—without a viable plan to replace them. Corrupt contractors are still in jail over the “Carrusel de Contratos” scandal where politicians and corporate thieves conspired to rob millions during the construction of Avenida El Dorado, the main thoroughfare leading to Bogotá’s international airport. Petro kept the fares on Bogotá’s Transmilenio bus system artificially low to buy popularity, creating an operating deficit and financial crisis that the following administration would have to fix, and automatically vilifying whoever would follow and have to make unpopular, drastic corrections.

On multiple occasions, Finance Colombia has reached out to Mayor Daniel Quintero for comment (on various issues), who through his press secretary has refused comment or reply.

On the other hand, Medellín’s professionally managed metro runs on-time, is clean and safe, and used by riders of almost every socioeconomic stratum. Medellín has continued to win international accolades throughout the years, hosting the World Economic Forum’s Latin America event in 2016, several UN events, and many delegations from foreign municipal governments to learn best practices. Many visit the city’s Ruta-N business and entrepreneurship incubator that can be credited, along with ACI (Agencia de Cooperación Internacionál), the city’s investment promotion agency with bringing countless jobs and investment to the Aburrá Valley; home to Medellin and its immediate suburbs like Envigado, Sabaneta, Itaguí, and Bello.

The city is home to several multinationals: Bancolombia, Colombia’s largest Bank; Grupo Sura, an insurance, investment & health care giant; Cementos Argos, which as a cement producer is the 4^th largest in the United States and exports to 27 countries; Nutresa, which is like a Latin American Unilever or Nestle, and newer companies like Viva Air. More precisely in the Medellín Suburb of Rionegro, the low-cost airline operates routes throughout Colombia & Peru, to and from the US, and is currently in expansion mode despite the COVID-19 Pandemic.

EPM Headquarters Building in Medellín’s Plaza Mayor

Another multinational with a very unusual business model is EPM, Empresas Públicas de Medellín. The public utility is responsible for sanitation, sewers, water, electricity, and natural gas in Medellín and much of the surrounding suburbs and rural areas. In a joint venture with global telecommunications provider Millicom called Tigo Une, it provides faster residential internet service than is available in many US cities. Earlier this year, they purchased the formerly insolvent utility networks of much of Colombia’s Caribbean coastal region. EPM already owns utility operations outside of Colombia, with assets of the multibillion-dollar company stretching from Chile to Mexico. EPM, though it does issue debt on international markets is not a publicly traded company. Neither is it a municipal utility. It is a separate company with professional management and (up until now) a board of directors to provide corporate governance, but with the city of Medellín as the sole shareholder. In the form of dividends, EPM provides almost 30% of Medellín’s municipal budget, but the key to this arrangement has been that it operates as a separate entity, expressly not part of the municipal administration, but of course with the city’s input. The mayor by statute is the chairman of EPM’s board of directors and has prerogative to appoint the CEO. As shareholder, the city also appoints board members.

A breath of fresh air?

Many in Medellín were pleased to see Daniel Quintero elected last year as a “breath of fresh air” and change from the traditional power families that have controlled politics, especially as he defeated Alfredo Ramos, son of a former governor and member of Centro Democrático, the party of “Uribistas,” personal acolytes of former President (now under house arrest for witness-tampering charges) Alvaro Uribe. With Medellín & surrounding Antioquia Uribe’s home turf (he was both mayor of Medellín & governor of Antioquia before becoming president of Colombia), it was something of a surprise that this local who was raised by a single mother who died when he was just 14 in a mostly poor neighborhood (Tricentenario) won the election. As a youth, Quintero worked as a street vendor struggling to put himself through college. No one knew quite what to make of him.

Quintero had politicked at different times as a member of Colombia’s Liberal Party, Conservative Party, and Green Party before establishing the “Tomato Party” as a publicity stunt to get himself noticed (see the headline photo). He gained attention by throwing tomatoes at pictures of politicians and people he didn’t like, such as Alvaro Uribe and then President Juan Manuel Santos, though he decided to support Santos’ re-election in 2014. He was then rewarded with the political appointment of running InnPulsa, Colombia’s national entrepreneurship promotion agency, then becoming vice-minister for ICT (Information & Communication Technologies) under Santos. In the last presidential election, Quintero initially supported mainstream liberal candidate & peace negotiator Humberto De La Calle, before switching his support to controversial former mayor of Bogotá Gustavo Petro’s (mentioned above) candidacy.

So no one knew what to expect, though it is clear they wanted more of the vice-minister of technology or InnPulsa director than the tomato throwing stunt man who once handed former EPM general manager Jorge Londoño a chunk of cheese (nonverbally calling him a rat).

A whiff of Limburger—stinky cheese.

Finance Colombia being primarily a business and finance publication rather than a political journal, heard some low intensity criticism of appointments that Quintero had been making in the city administration and the way he was making them, but did not actively pursue the stories at the time. Quintero made some other moves that seemed politically silly, such as writing the Cuban government to ask for doctors to help with the COVID-19 pandemic. Regardless of the merits of Cuban medical missions (which are very dubious), it is inconceivable that the current national government would permit such activity, and the action could only embarrass the mayor, which it did. Finance Colombia chalked it up to benign political inexperience.

The mayor also fought back a scandal where he was accused on social media of inappropriate sexual conduct before he was mayor, but even more ominous was his reaction to the press, which brought condemnation from Colombia’s Foundation for Press Liberty, FLIP:

“FLIP was able to document that Quintero personally pressured media executives and pointed out journalists as being opponents of his administration as a way to avoid questions about matters on which he must be held accountable…In events related to this situation, administration officials tried to force national and local media to improve the image of the mayor in exchange for advertising. Telemedellín (City government’s official TV channel) officials asked W Radio to rectify a truthful publication and also that the media agree to subscribe and publish a joint statement with Telemedellín to disseminate as true a situation that did not correspond to reality,” said the journalism rights defense group.

In other words, “I will buy advertising with your paper if you help me bury this scandal.” FLIP also denounced the mayor for pressuring newspaper El Espectador to block coverage of the scandal. According to FLIP, and El Espectador’s own account of the misdeeds, the publisher, Fidel Cano, responded by sending the questions to the mayor that his reporters had been trying to ask. “The mayor of Medellín assured the director of the newspaper that he would take legal action if the publication affected his reputation” (he never did).

All this so far and the mayor has served only his first 8 months of a 4-year term.

The mayor’s official press conference, canceled at the last minute, crowing “Why Medellin is the world’s standard in the assertive management of Covid-19” as cases in the city began to skyrocket

On June 27, the Quintero administration scheduled a press conference titled “Why Medellín has one of the lowest contagion and mortality rates in Latin America?” scheduled for July 2^nd, and led by Daniel Quintero himself, backed by Andree Uribe, Medellin’s Secretary of Health, Alejandro Arias, Medellín’s Secretary of Economic Development, and Eleonora Betancur, the director of ACI Medellin. The day before the press conference, it was abruptly canceled. It seemed the mayor wanted to take credit for good news but avoid bad news. The headlines that day in El Colombiano, Medellín’s largest daily? “100,000 cases of Coronavirus in Colombia, Where are we going?” and with 40% of ICU units full, “Doctors of Antioqua appeal for total & obligatory quarantine.”  The last weekend of August the ICUs are now 70.79% full. The day the press conference was to be held, a headline in El Colombiano announced a coronavirus outbreak with 36 infected in the La Paz prison in Medellín’s southern suburb of Itaguí.

The cases—and deaths were just beginning to skyrocket and two months later Colombia has one of the world’s worst mortality rates on a trailing 7 day average. According to the Colombian government, Antioquia department (Medellín is the only large city in Antioquia) alone has had 77,709 cases so far. Colombia now has over 18,000 deaths from COVID-19, most within the past two months. 1,603 in Medellín & surrounding Antioquia.

Last month, EPM general manager Álvaro Guillermo Rendón announced a memorandum of understanding with InnPulsa, the same national government agency formerly run by Quintero himself, that would, if more than just talk, “convert EPM into a laboratory of smart cities, the 4^th industrial revolution, and the orange economy.” All well and good (maybe, but that doesn’t sound like the function of a utility), but what the public did not know was that this fundamental change in corporate strategy and negotiations with the national government were worked out without the knowledge, discussion or approval of the company’s board of directors. EPM was being treated not as a separate entity but part of the municipal administration.

OFFICIAL STATISTICS: As of August 28th, Antioquia had 77,709 total COVID-19 cases, 1.603 deaths and hospital intensive care wards were over 70% of capacity over 80% of Antioquia’s cases are from metro Medellín.

The $2.7 billion dollar WTF

On August 10, EPM sent out a press release (and the mayor tweeted) that EPM would be initiating legal proceedings in the amount of  approximately $2,7 billion US dollars against the consortiums responsible for construction of EPM’s troubled Hidroituango dam that suffered catastrophic setbacks due to unexpected flooding in 2018 and design flaws that were thus revealed. Whether such legal action is a good idea is debatable: On one hand there certainly were defects that have cost the company millions and delayed the project by over a year. On the other hand, litigation could potentially bring the project to a halt, as EPM is still depending upon the parties it is suing to complete the project before certain deadlines, or it faces economic penalties in power generation commitments of over $150 million USD. It is also far from certain that EPM would prevail in its legal crusade against all the parties named, some of which have nothing to do with the construction defects that led to a tunnel blockage during construction.

The shocking thing is that Mayor Quintero along with Rendon and Alexander Sánchez Pérez, EPM’s vice president for legal affairs, declared this multibillion dollar action without discussion, input or even knowledge of the company’s board of directors!

The next day, the entire board of directors, except for Quintero himself, resigned.

Soon Quintero tried to justify his actions saying “there was no time” and he had to act, but he had already been mayor for 8 months and ran on a campaign of rectifying the Hidroituango situation (remember his cheese stunt with the former general manager?) and so was aware of the situation. If not, he had 8 months to be brought up to speed. At any rate, without board ratification, such actions have dubious legal force, and as bad or worse, prove a lack of corporate governance at EPM and direct political control. CEO Rendón clearly answers not to the board of directors but to a politician.

One day after the board of directors of EPM resigned, the entire board of directors of Medellín’s storied Ruta-N also resigned, along with its executive director, Juan Andrés Vásquez. Ruta N was already under its third executive director in Quintero’s 8 month old administration. Vásquez learned that Quintero was replacing him after Quintero announced Trump-style, in the media, saying he “had drifted away from the administration.” Like EPM, Ruta-N is not a city agency directly under the administration, but a public-private partnership with professionalized management and governance, and internal merit-based personnel policies.  Sources inside Ruta-N say that Quintero had been trying to circumvent the qualifications-based hiring of the business incubator to install friends and supporters into sinecures. People inside both organizations indicate that morale is at bottom.

Beverage giant Postobón rescinded its financial support of a health initiative spearheaded by Ruta-N saying it no longer had confidence in the entity’s governance. Postobón had already spent $4 billion pesos on the initiative to build respirators for coronavirus patients but said it would continue to donate, just elsewhere after the board resignation.

That same week, in reaction to what it called “a deterioration of corporate governance controls at the company,” global ratings firm Fitch downgraded EPM’s credit as a bond issuer to one notch above junk bond status. In a statement, the foreign, independent agency stated:

“Fitch believes recent actions taken by the company are contrary to the Governability Agreement, signed on April 23, 2007, between the City of Medellin and EPM’s management, in which the municipality agreed to respect the autonomy of EPM as an industrial and commercial enterprise of the state and to act exclusively through the board of directors.”

Flailing about

The mayor scrambled to assemble a new board of directors for EPM, which as an issuer of debt in the international capital markets, must answer to institutional bondholders. Over the ensuing days, Quintero variously announced that Claro Colombia CEO Juan Carlos Archila would join EPM’s board (creating a conflict since Claro competes with Tigo Une), Grupo Santo Domingo’s Alberto Preciado,  Luis Fernando Rico, formerly of Isagen, another Colombian utility, and Sandra Suarez, the former general manager of newsweekly Semana all rejected Quintero’s oddly public nominations. Did he not confirm with them beforehand if they would accept the appointments, or did they publicly reject the nominations as a rebuke to the mayor?

Meanwhile, EPM’s board representative to Tigo Une, Federico Arango Toro also resigned in a public letter saying he wanted no part of Quintero’s administration.

Banks and insurers are already turning their back on EPM, citing a lack of control at the organization. EPM had to admit that certain loans and lines of credit had been shut off after the board resignations. An internal document seen by Finance Colombia stated that the firm may have difficulty finding or renewing certain insurance coverages.

In the midst of all this, Colombia’s human rights tribunal set up as part of the 2016 Peace Accords, the JEP (Special Jurisdiction for Peace) has subpoenaed general manager Rendón under threat of arrest for ignoring during his 8 months as the utility’s legal representative, a year old subpoena for documents regarding possible obstruction of the search for the remains of victims of violence during the construction of Hidroituango, before Rendón’s appointment.

Medellín’s city council is on scheduled recess, but they have publicly asked the mayor to reconvene a session to discuss the governance crisis. Under law, (article 23, law 136 of 1994), they can only formally convene during a recess at the mayor’s request.

Labor unions & business community united

EPM’s largest labor union, SINPRO has called for a protest on Wednesday, September 2nd, for everyone in the city to turn out their lights for 30 minutes at 8pm, and for workers and the public to gather outside of the company’s headquarters in Plaza Mayor at that time for a rally in defense of EPM.

“When Medellín turns off, we hope that our leaders will understand that this is everyone’s problem, and that a city shut down doesn’t serve anyone. If EPM is in crisis, it doesn’t just shut down the city, it shuts down the country,” said union President Olga Lucia Arango.

The union is also demanding explanation of EPM general manager Rendon’s alleged private gym and luxury remodel during a time the company is under self-imposed austerity orders.

Civic leaders, executives, and nonprofits from across the region have begun to organize in reaction to the mayor, forming on August 25, a veeduría, or citizen’s oversight group ”made up of people with no particular economic interests in either EPM or the mayoralty that will work to take care of the heritage of the city and the interests of all Medellinenses.”

The initiative, called “Todos por Medellín” (Everyone for Medellín) is backed by over 40 groups, including the Chamber of Commerce of Medellin (in Colombia, chambers of commerce perform a quasigovernmental function, for example, as the registry of corporate and nonprofit organizations, and their articles of incorporation), the Intergremial committee (a grémio is a trade group or business association), and Proantioquia, the region’s primary civic benevolent foundation.

The mayor gets combative

Last Thursday, Mayor Quintero showed no contrition, but tried to dismiss the concerns as political machinations. “The oversight is fine, but we need oversight agencies to see everything. They didn’t see a lot of things, for example, $17 trillion of debt in the last 15 years. How come they didn’t see Orbitel, UNE, Antofagasta, Porce III and Hidroituango? A mayor appears to them who responds, has character, then a lot of politicians come out to do oversight. The veeduría is welcome but we are going to review everything. That the mayor is the one who manages the networks and they govern? No!” he said in a press conference.

Taking a page from the playbook of his preferred presidential candidate and apparent ally Gustavo Petro, who had a disastrous term as mayor of Bogotá and was temporarily removed from office by the national government, Quintero frames it all as a nefarious plot against him (does he think international ratings firm Fitch is in on the plot?)

“There are some groups full of politicians who want to carry out processes to revoke the mayor, that have been moving for a long time, we are ready, we have no problems in showing results and what we have done. They are worried because a long time ago they did not meet an independent mayor, a mayor who is not beholden to politicians or businessmen, but to the people,” said Quintero.

Navegamos entre fuerzas oscuras que se resisten al cambio. Con fe y sin miedo seguiremos adelante con transparencia, honestidad y contra la corrupción y la politiquería.

— Daniel Quintero Calle (@QuinteroCalle) August 26, 2020

CAPED CRUSADER? Quintero seems to fancy himself a hero navigating “between dark forces that resist change. With faith and without fear we will continue forward with transparency, honesty, and against the corruption and politicking” he tweeted last week after learning of the group Todos por Medellín.

Analysis

Quintero’s plan seems to be to blame his woes not on his own actions, but on former President Alvaro Uribe. Uribe’s reputation has steadily declined since his presidency, and where he was once seen as the man who rescued Colombia from communist rebels and drug cartels, his legacy has steadily soured as an avalanche of allegations and evidence piles up that tie him directly to paramilitary death squads during his time as governor, and indirectly to narcotraffickers and civilian massacres committed during his presidency. As if that were not enough, he is currently under arrest and confined to his northern Colombia ranch on charges of witness tampering, attempting to frame leftist senator Ivan Cépeda, a nemesis of Uribe in the Colombian senate.

Quintero wants to blame Uribe & his Centro Democrático for his woes, but since Uribe founded the party in 2013 it has never won a mayoral election in Medellín. The last Uribe supporter to hold the office was Luis Pérez from 2001-2004. Perez later abandoned Uribe for President Santos, working in 2015 as his regional campaign coordinator to defeat Uribe’s chosen presidential candidate Ivan Zuluaga.

Blaming the Uribe bogeyman may be a good tactic after the damage that has been done, but those aghast at recent developments extend far outside Uribe’s sphere of influence. Uribe did tweet support for the citizens movement, and Petro in support of Quintero, but opponents of Uribismo are also speaking out against Quintero. Former mayor of Medellín (2004-2008) and governor of Antioquia Sergio Fajardo immediately wrote a letter of concern, on August 12, admonishing Quintero’s actions.

Medellín’s previous mayor, Federico Gutierrez, nicknamed Fico, surprisingly upset Uribe’s candidate Juan Carlos Vélez to win the mayoralty in 2016. His letter, also dated August 12 is even more blunt. “EPM & Medellin are in danger.”

Letter from former Medellín Mayor Federico Gutierrez: “EPM & Medellín Are In Danger”

“The discourse of Quintero is based on lies. He talks of social struggle, of a class struggle, the same ideas of Gustavo Petro, who furthermore was the first to celebrate and support the mayor’s decision to deinstitutionalize EPM, which obliged the board’s renunciation. But look at the contradictions: What kind of social struggle destroys the motors of progress? EPM is that very thing, an incalculable help for the most vulnerable communities, a tool to breach social divides.” – excerpt from Federico Gutierrez’s letter.

Paisas, as people from Medellín & Antioquia call themselves tend center to right on the political spectrum and have less appetite for the far-left adventurism much more popular in Bogotá. Marxist talk like “class struggle” doesn’t go over so well here. Before this editor started Finance Colombia or even moved to Colombia, representatives from the city (going back to before 2013) would call and extend invitations: “Come to Medellín, let us show you what we are doing” with genuine pride. At the time, this editor was an analyst covering the Latin American services sector for a Connecticut-based research firm. “Look, we want to show you the good things we are doing!” Apparently with no other motivation beyond civic pride and attracting investment and positive attention. “We are building the Metrocable system” a network of cable cars extending far up into low income hillside neighborhoods on the valley walls. “We are building it so everyone can participate in our economic growth,” they said, beaming with pride. Not politicians or political appointees, but entry-to mid-level civil servants.

After moving to Colombia, first to Bogotá and launching Finance Colombia, the outreach didn’t stop. Medellín kept calling. “Come see what we are doing!” In 2015, Finance Colombia published “Social Inclusion: The Secret Sauce To Medellín’s Incredible Renaissance.”

They were going about it pragmatically, person to person, neighborhood to neighborhood, but without any ideological polemics or Marxist-Leninist babbling. There was no talk of class struggle, no attack on the city’s beloved institutions, whether well-established like EPM or new innovations like Ruta-N. Generally, each succeeding administration handed the keys over to the next politely, and with decorum.

One thing that unites Paisas, especially those in Medellín is the progress the city has made, going in less than 3 decades from one of the most dangerous on earth to an international showcase. Startups and international businesses have entered Colombia by first setting up operations in Ruta-N then moving out into larger spaces as they gain a foothold in the country. Get in a taxi and instead of trying to rip you off like in some parts of the country, if the driver realizes you are a foreigner, they will inevitably ask “What do you think of Medellín?” and beam with pride like you just presented them their firstborn child if you have something nice to say.

When protesters rioted in Bogotá last November, partially destroying their own transportation infrastructure and battling with police, Paisas marched peacefully. A few vandals were quickly confronted by peaceful protesters, and students came to undo the defacing they caused.

Medellín has built a strong credit rating in international markets for municipal debt, and EPM has enjoyed an investment grade credit and risk profile. There has been a level of peace between labor and employer, business and government rarely seen elsewhere in Latin America. Is it run by saints? Of course not. But that is precisely why the checks and balances of good governance are important, and Quintero seems to either not understand this, or have other priorities. EPM provides the city with more than electricity, water, and natural gas services. The international corporation provides almost 30% of the city’s revenue by way of operating profits. The fortunes of every residence and business in the Aburrá Valley (where Medellín is the largest city) are tied to EPM. The vitality of the city’s foreign investment attraction is tied to Ruta-N. Investors, both institutional and global-minded individuals are attracted by collaboration and progress, and repelled by scandal, conflict and controversy.

Being a crusader is easy. Throwing tomatoes at pictures is easy. A child can do it. Governing is complex and requires accountability. Medellín Mayor Daniel Quintero is sawing at the very foundations of Medellín’s success, by attacking its governance and institutionalism. It may very well be a good idea to take legal action against the consortiums that are (still) building the Hidroituango dam. But to launch a multibillion-dollar lawsuit behind the back of your own board of directors? No deliberation by the body designed to deliberate such fundamental issues? Are we seeing dictatorial tendencies, the likes of which one would expect from a Banana-Republic Caudillo?

When criticized, the new mayor goes into attack mode. Seeing everyone from the labor unions to civic leaders as a cabal “out to get him.” This editor remembers seeing such behavior at the beginnings of Chavismo in Venezuela. It is also Donald Trump’s style. Attack someone who is offering constructive criticism and they often will instinctively get sidetracked trying to defend the legitimacy of their criticism, allowing attention to be shifted from the original critique, no matter how legitimate.

“Ah, he’s going after the elites,” one more populist journalist friend said to this editor, when the conflict between former directors and the mayor became public. “Who the hell do you want running a multibillion-dollar international energy company?” this editor replied. “They had damn sure better be elite and know what they are doing!”

The former EPM board had directors like Javier Gutiérrez, who was former president of oil giant Ecopetrol, and general manager of energy company ISA; Manuel Mejia, former general manager of Colombiana de Comercio (distributor or manufacturer of brands in Colombia such as AKT motorcycles, Foton trucks, Castrol lubricants, Royal Enfield motorcycles, and Kalley appliances); Andrés Correa, formerly part of the insurance multinational SURA; and one of EPM’s own retired executives: Jesús Aristizábal Guevara, a civil engineer.

The new EPM board of directors is notable for having a preschool teacher, community activists, former politicians, lawyers, but no large company leadership experience. The mayor did nominate a few, but they all refused. Now, the mayor’s new board will have to navigate the $2 billion USD litigation that he unilaterally launched, and the war he has started with what seems the entire political, business, civic, and even labor community of Medellín. What do they know about international capital markets and the mechanics of bond pricing and currency risk? This editor wishes them luck. We want to see EPM succeed and Medellín do well. The only way this will happen is if they make drastic course corrections. It is not too late for the mayor.

On the other hand, we are only 8 months into a four-year mayoral term. This editor has never seen so many disparate people and institutions unite since the 9/11 attacks in the US. There, the population at least temporarily united behind then President Bush. In August, 2020, sectors from labor to enterprise are all uniting against Quintero. He is at a juncture in his mayoralty. He can attempt to reconcile, or he can take Gustavo Petro’s style book and fancy himself the martyr and class-struggler that everyone is out to get.

Mayor Quintero talks about making Medellín what he calls “software valley,” but foreign investors will not locate to a destination mired in conflict that can’t keep its lights on. He was elected without a power base, to some degree a rejection of the Uribista alternative. He clearly views the civic dissatisfactions with his moves as an Uribista plot. Surely they are included in his menagerie of new opponents, but they weren’t the ones who led to a loss of $30 million USD in EPM’s outstanding bond value in the space of 3 days. There were no Uribistas behind Wall Street firm Fitch deciding to lower the utility’s credit ratings. The only “forces of darkness” Fitch cited was Quintero’s “deterioration of corporate governance controls at the company.”

In this editorial, Finance Colombia calls on the mayor to rectify his course and work in a more collaborative, professional and transparent spirit with all the city’s stakeholders, or alternatively on Paisas to democratically and civilly protect the trajectory of amazing progress the city has made in the last two decades. Choose quiet progress over loud and bombastic stagnation. Cooperation over tomato-throwing confrontation.

Medellín Mayor Daniel Quintero (Photo courtesy Alcaldia de Medellín)

With that paragraph (translated) terminating his short letter (full letter below), Federico Arango Toro resigned from telecommunications provider Tigo UNE’s board of directors after representing EPM’s interest as shareholder for the last 14 years.

Medellín Utility EPM once provided telecommunications services along with gas, electric, water and sanitation, but spun off its telecommunications operations in 2006 into a joint venture with global telecommunications operator Millicom, which operates under the Tigo brand name. This gave UNE (EPM’s telecommunications operations) the scale and technology platforms to stay competitive and deploy new technologies such as advanced mobile communications and fiber optic connectivity to residences and businesses.

EPM and Medellín’s sports & recreation utility INDER (Institute of Sports & Recreation) retain 50% + 1 share, with the rest belonging to Millicom corporate entities. Millicom is the operating partner of the joint venture. Until Sunday, Álvaro Rendón served as board member representing EPM’s interest.

Medellín Mayor Daniel Quintero has sparked something of a revolt in Medellín’s business community by allegedly interfering in the operations, governance and personnel decisions of several of Medellín’s institutions including the public utility EPM that generally is run at arm’s length from Medellín’s city hall and political infrastructure. The entire board (minus Mayor Quintero) resigned in protest of the Mayor’s repeated circumvention of the board of directors. This gained global attention as EPM owns and operates assets from México to Chile, and issues bonds on international capital markets. Fitch Ratings has already downgraded EPM’s credit rating in response to the turmoil, and some banks have refused to do business with the multibillion dollar utility.

One day after EPM’s board resigned in protest, the board of directors of business incubator Ruta-N resigned in protest, accusing the mayor of attempting to politicize the institution and appoint political friends, circumventing personnel and civil service policies.

This week, over 300 local entrepreneurs, business people and civil society actors signed a letter denouncing the mayor’s actions and governance, only 8 months into his term. When offered the opportunity to comment or respond, the mayor through his press representative declined comment for this article.

Federico Arango Toro renunciation letter from Tigo Une

The ratings reflect the company’s stable business position, and Fitch’s expectation that the company will maintain leverage commensurate with the rating level in the medium term. Fitch expects that the company’s investments will support the company’s stable business position by diversifying revenue streams and improving network coverage in a competitive Colombian market.

Key Rating Drivers

Trend Outweighs Temporary Rise in Leverage: Fitch expects that Movistar’s leverage metrics will rise above Fitch’s downgrade sensitivities in the near term before returning to more conservative levels. The refinancing of the hybrid note, which qualified for 50% equity credit, and the impact of the economic lockdown on operating margins will cause debt/adjusted EBITDA and net debt/adjusted EBITDA to both rise above Fitch’s sensitivities in 2020. The stability of the company’s business position and Fitch’s expectation of strong operating cash flow generation both support Fitch’s view that the company will deleverage to around 2.25-2.50x over the rating horizon, in line with the company’s trends since the 2017 recapitalization.

Stable Operations Provide Flexibility: Movistar has demonstrated relatively stable operating performance over the last four years, as revenues have consistently grown in the low to mid-single digit range. Heading into the coronavirus downturn, the company secured an important business contract, which should contribute consistent cash flows over the rating horizon. Fitch expects that the company will be able to maintain adjusted EBITDA margins in the 30%-32% range over the rating horizon, sufficient to cover investments, reduced interest expense and consistent cash taxes. The company has some flexibility to reduce capex in 2020 following a heavy investment period. As part of wider Telefonica initiatives throughout the region, Fitch expects Movistar to divest non-core assets, which should further improve financial flexibility.

Coronavirus Impact on Telecoms: Fitch does not expect the same level of disruption to telecom as other sectors from the coronavirus. Increased screen and voice time, across both fixed and mobile platforms, will likely be offset by declining disposable income, pressuring revenues and EBITDA generation. A prolonged recession, and/or significant government intervention into telecom operators’ price-setting, would be negative. The Colombian mobile market is mostly prepaid, with approximately 80% of subscribers, which are more price-sensitive and lower value than post-paid. Positively, low broadband penetration presents a growth opportunity; however, the company is in a weak competitive position in Bogota and Medellin.

Steady Market Position: Movistar is the second largest telecom operator in Colombia, behind America Movil S.A.B. de C.V.’s (A-/Stable) Claro, which is roughly twice the size. The company’s competitive position is supported by subscriber shares of 25% in mobile, 17% in broadband, and 9% in Pay TV share. These market shares have been generally stable over time; and Fitch expects Movistar and UNE EPM Telecomunicaciones (Tigo Une; BBB/Negative) to vie for the #2 spot behind Claro. In 2019, Novator Partners, the owners of Chile’s WOM S.A. (WOM; BB-/Stable) participated in the December spectrum auction, although the strategy for a Colombian entry is unknown at this point.

Diverse Revenue Streams: The company has a diversified service portfolio with a national footprint and improving 4G and fiber broadband networks. Mobile accounts for approximately 60% of revenues in 2019, in line with the regional median. The company’s fixed line presence, where it is the #3 behind Tigo Une and geographic distribution improved with the consolidation of operations in Bucaramanga and Baranquilla following the PARAPAT resolution. Fitch expects that broadband and Pay TV operations will continue to exhibit strong growth as the company invests in its fiber network to provide broadband and IPTV services.

Parent and Government Linkages: A linkage exists between the company and its 67.5% owner, Telefonica SA (BBB/Stable); however, Fitch’s ratings of Movistar are on a stand-alone basis. As the ratings do not assume any further support from Telefonica, Movistar’s ratings have not been affected by the proposed spin-off of Telefonica’s Latin American (ex-Brazil) operations. The exact nature of the spin-off is unclear at this point, and will not impact the ratings unless there is a greater consolidation of financial and operational functions between the regional entities. The Colombian government (BBB-/negative) has a 32.5% stake but does not exert control over the management of Movistar; therefore, the ratings are also not directly linked.

Derivation Summary

Movistar’s overall business and financial profile is similar to that of direct competitor UNE EPM Telecommunications (Tigo Une; BBB/Negative), with similar revenue shares of the overall Colombian, although UNE EPM has a longer history of maintaining lower leverage. Tigo Une is also relatively stronger in the fixed broadband and Pay-TV business, which could imply more subscription like cash flows, as the Colombian mobile market is mostly prepaid (~80%). Tigo Une’s ratings are constrained by the ‘BBB’ Country Ceiling of Colombia.

Sister company Telefónica del Peru (TdP; BBB/Negative), has a stronger business profile, owing to its leading market shares in both fixed (approximately 70%) and mobile (approximately 35%). Leverage at the two is broadly similar, following TdP’s international bond placement in 2019. The Peruvian telecom space has been even more competitive than Colombia’s, due to two new entrants since 2015.

Compared with Telefónica Moviles Chile (TMCH; BBB+/Stable), Movistar has weaker market shares and a less conservative financial structure. ENTEL (BBB-/Negative) has seen its leverage approximately double since entering the Peruvian market nearly five years ago. While the company benefits from its status as the largest Chilean mobile operator with leading post-paid market shares and ARPUs, the Negative Outlook on its ratings reflects consistently negative FCF and leverage that has been too high for investment grade over the last three years.

Movistar’s greater scale, diversified revenue streams compare favorably with Colombian fixed-line provider Empresa de Telecomunicaciones de Bogotá (ETB; BB+/Stable). ETB maintains a ‘BB+’ rating on the strength of its conservative financial structure.

 Key Assumptions

• Fitch’s Key Assumptions Within the Rating Case for the Issuer
• Total revenues growing from COP5.16 billion in 2019 to COP5.45 billion in 2022, with adjusted EBITDA generation in the COP1.60 – COP1.65 range (approximately 30% adjusted EBITDA margins, which exclude asset sales and IFRS16 add-back);
• Mobile subscribers growing in the 1%-3% range, with postpaid growing more quickly than prepaid, and ARPUs declining by 3% on average;
• Fixed line subscribers flat as telephone attrition is mitigated by growing broadband and PayTV customers, resulting in ARPUs growing in the 3%-5% range;
• SENA revenues and EBITDA in line with company guidance;
• Capex of around 14%-15% of revenues in 2020 and 15%-16% thereafter;
• Some deterioration in working capital as customers lengthen out payment cycles;
• Asset sales to continue.

Rating Sensitivities 

Factors that could, individually or collectively, lead to positive rating action/upgrade:

• Total debt/EBITDA falling below 2.0x or net debt/EBITDA falling below 1.75x on a sustained basis due to a strengthening of the competitive position and/or FCF being used to pay down debt, along with an improvement in the strength of the company’s broadband and pay TV market position.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

• Total debt/EBITDA rising above 3.0x or net debt/EBITDA rising above 2.75x on a sustained basis due to a weakening of the competitive position and/or debt-financed acquisitions.

Liquidity & Debt Structure 

Adequate Liquidity: Movistar has adequate liquidity, backed by its strong operating cash flow generation and manageable amortization profile. As of March 31, the company had cash of $121 billion COP, against short-term debt (ex-leases) of $289 billion COP, following a heavy 1st quarter of capex. The company refinanced its $500 million USD hybrid note in the first quarter of 2020 with bank debt. The company actively hedges its $750 million USD 2022 bond exposure, which provides additional financial flexibility as USD:COP has depreciated by approximately 15% in 2020.

Summary of Financial Adjustments

• Operating leases adjusted per new criteria
• Changes to opex to remove asset sales, other changes to opex and working capital classifications.

In Colombia, Colombia Telecomunicaciones S.A. E.S.P. (ColTel) operates the Movistar brand name.

Key Rating Drivers

Improving Financial Profile: ColTel’s financial profile, particularly leverage, has improved drastically in the last three years, with EBITDA net leverage having improved from 5.3x at YE2015 to 2.4x at YE2018. In 2017 the company’s owners, the Colombian government and Telefonica SA, recapitalized the company, curing it of its PARAPAT and MINTIC liabilities. The capitalization also freed approximately COP $500 billion per year for investments or debt reduction. Fitch expects the company to de-lever by another approximately .5x over the medium term, to around 2.0x, as revenue growth translates into EBITDA expansion. As part of wider Telefonica initiatives throughout the region, Fitch expects ColTel to divest non-core assets, which should further improve financial flexibility.

Colombia Telecomunicaciones S.A. E.S.P.

Fitch has upgraded the following ratings:

• • FC IDR to ‘BBB-‘ from ‘BB+’;
  • LC IDR to ‘BBB-‘ from ‘BB+’;
  • 2022 USD Senior Unsecured Notes to ‘BBB-‘ from ‘BB+’;
  • Subordinated Perpetual Note to ‘BB’ from ‘BB-‘.

Improving Cash Flow Generation: Despite the competitive environment in Colombia, the company has grown revenues in the low single digits consistently for the last several years. Fitch expects this trend to continue as the company harvests its network investments in both fixed and mobile. Stable EBITDA margins around 31% should translate into positive free cash flow (FCF) for the company as capital intensity moderates. Fitch expects capex of 15%-16% of revenues over the medium term, in line with 2018, down from 20% from 2015-2017. Investments focused on higher value services, along with network sharing agreements, should help the company optimize its capital deployment going forward.

Steady Market Position: ColTel is the second largest telecommunications operator in Colombia, in terms of the revenue market share, behind America Movil S.A.B. de C.V.’s Claro Colombia. The company has a diversified service portfolio with a nation-wide operational footprint and improving 4G and broadband networks. The diverse revenue streams are supported by subscriber shares of around 25% in mobile, 18% in broadband, and 10% in Pay TV share, according to March 2019 data from the Ministerio de Tecnologias de la Informacion y las Comunicaciones (MinTic). These market shares have been generally stable over time and Fitch expects carriers to largely match each other’s commercial offers.

Diverse Revenue Streams: ColTel boasts a relatively well diversified revenue stream, which improved with the consolidation of fixed-line operations in Bucarmaranga and Baranquilla following the PARAPAT resolution. Fitch expects broadband and pay TV’s revenue share to grow to approximately 30% by 2022, up from 19% in 2015, with mobile contributing around 58%, down from 62%, as the company moves away from its traditional voice offerings through the expansion of its mobile and fixed data services. The company’s service diversification is offset by its single country focus, and the high level of competition in Colombia.

Competitive Environment in Colombia: The Colombian telecom space remains very competitive, as carriers offer aggressive data packages to defend market share. Fitch expects that the cost pressures should contain margins around 31% for ColTel, in line with peer UNE EPM (approximately 30%) – operating under brand name Tigo, both of which lag America Movil’s Claro Colombia at greater than 40%. Claro’s relative dominance has brought regulatory scrutiny, though it has not yet translated into sustainable gains in market share for the other two main players. Positively, low broadband penetration relative to regional peers presents an opportunity for growth, although all carriers are expected to invest heavily in their broadband offerings.

Parent Subsidiary Linkage and Government Related Entity Criteria: A linkage exists between Telefonica SA (TEF; BBB/Stable); however, Fitch’s ratings of ColTel are on a stand-alone basis and do not assume any further support from either the Colombian government (BBB/Stable), or TEF. The Colombian government does not exert control over the management of ColTel, and has announced its intention to divest its 32.5% stake in the company, which does not impact the ratings.

 Derivation Summary

Compared with Colombian operators, ColTel’s overall business profile is similar to that of direct competitor UNE EPM Telecommunications (Tigo UNE; BBB/Stable), with similar revenue shares of the overall Colombian telecom market. UNE EPM has a longer history of maintaining lower leverage, and a stronger broadband network. ColTel’s greater scale, diversified revenue streams compare favorably with Colombian fixed-line provider Empresa de Telecomunicaciones de Bogota (ETB; BB+/Stable). ETB maintains a ‘BB+’ rating on the strength of its conservative financial structure.

Sister company Telefonica del Peru (TdP; BBB/Stable), has a stronger business profile, owing to its leading market shares in both fixed (approximately 70%) and mobile (approximately 35%). Leverage at the two is broadly similar, following TdP’s international bond placement in 2019. The Peruvian telecom space has been even more competitive than Colombia’s, due to two new entrants since 2015. Compared with Telefonica Moviles Chile (TMCH; BBB+/Stable), ColTel has weaker market shares and a less conservative financial structure.

ENTEL (BBB-/Negative) has seen its leverage approximately double since entering the Peruvian market nearly five years ago. While the company benefits from its status as the largest Chilean telecom operator with leading post-paid market shares and ARPUs, the Negative Outlook on its ratings reflect the leverage that is high for the rating category.

 Key Assumptions

 Fitch’s Key Assumptions for the Issuer

• Mobile revenues growing around 1%-3%, as mobile service revenues averaging approximately 1% due to competitive pressures on ARPUs being offset by growing equipment revenues. Fitch expects the post-paid/prepaid split to remain around 25%/75%;
• Fixed revenues growing by 3%-5% as broadband and PayTV revenues offset declines in fixed-line voice. Fitch expects the company to pass around 500,000 homes in 2019, for a total of one million, with a take-up rate improving from 18% to 25% over the long-term;
• EBITDA margins around 30%-31%, as competitive pressures and efficiency efforts offset to largely keep margins stable;
• Capex of 15%-16% of revenues.

Rating Sensitivities  

Developments That May, Individually or Collectively, Lead to Positive Rating Action: Total debt/EBITDA falling below 2.0x or net debt/EBITDA falling below 1.75x on a sustained basis due to a strengthening of the competitive position and/or FCF being used to pay down debt, along with an improvement in the strength of the company’s broadband and pay TV market position;

Developments That May, Individually or Collectively, Lead to Negative Rating Action: Total debt/EBITDA rising above 3.0x or net debt/EBITDA rising above 2.75x on a sustained basis due to a weakening of the competitive position and/or debt-financed acquisitions.

 Liquidity

ColTel’s liquidity has improved after the capitalization process that paid the PARAPAT liability and afforded the company increased financial flexibility. ColTEl proactively undertook liability management initiatives to reduce debt and extend its amortization schedule.

Fitch expects the company to achieve FCF margins around 5%-6% in the medium term, in line with 2018’s 5.0%, which represents an improvement from consistently negative FCF generation pre-2018. The group’s liquidity position is bolstered by stable access to capital markets and lines of credit totaling COP $1.05 billion.

The company’s debt is approximately 21% fixed rate, and primarily consists of the USD $750 million notes (COP2.4 billion), along with local bonds totaling COP $500 billion due in 2024 and 2029. As of June 30, 2019, the company reported current debt of approximately COP $384 million, against cash of approximately COP $168 million. The company’s hybrid bond, to which Fitch applies a 50% equity credit, is callable beginning in first-quarter 2020.

Millicom operates in Colombia under the Tigo brand, and jointly owns Medellin’s UNE with municipally owned EPM.

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.

Solid Performance:

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.

Increased Leverage:

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.

Key Assumptions:

–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.

Rating Sensitivities:

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.

Liquidity:

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.

Fitch Ratings has affirmed the ratings for the Municipality of Medellin as follows:

• Long term foreign Issuer Default Rating (IDR) at ‘BBB’;
• Long term local currency IDR at ‘BBB+’;
• National Rating at ‘AAA (col)’;
• Short term National Rating at ‘F1+ (col)’.
• COP $141,000 million notes at ‘AAA(col)’;
• COP $248,560 million notes at ‘AAA(col).
• The Rating Outlook is Stable.

The 100% ownership in EPM represents credit strength to Medellin due to the important amount of common and special dividends transferred from the entity, increasing Medellin’s financial flexibility. Also in 2014 the city received a significant amount of capital from the merger between UNE and Millicom.

Debt
Regarding debt, in 2014 Medellin disposed of USD $50 million with a development bank. Additionally, in August the municipality issued bonds for COP $248,560,000 in two series with maturities of 10 and 30 years. The proceeds were used to substitute domestic debt with local banks. Medellin registered COP $1,179,433,000 (approximately USD $357.5 million) debt as of Sep. 30, 2015, concentrating 67% of it in foreign debt, these are not hedged to the exchange rate risk.
Internal debt is composed of two programs of bonds, in 2016 the payment of COP $141,000 million notes is anticipated. Considering the composition of debt and the payment of ordinary bonds in 2016, the administration is considering measures to reduce the risks, and is working to get hedge to the exposure to the exchange rate. Fitch will monitor the actions defined. By 2014 and according to Medellin’s estimates, the interest to operational savings ratio ascended to 5.3%, a level significantly low relative to the maximum 40% established by the Ley 358 (Law 358).
On the other hand, debt represented 78.5% of current revenues at the end of the year, a level below the 80% maximum established as a limit in the mentioned law. Since the commitment through future budget allocations that the administration has adopted as a mechanism to execution of the development plan, the sustainability indicator rose in 2013 – 2014. Nevertheless, Fitch believes that credit metrics are appropriate for the risk level assigned, and the indicators will fall in the next years. Pension liabilities could represent a contingency in the long-term. According to Medellin the coverage of its pension liabilities will be at 29.4% at the end of 2015, considering resources in FONPET and its own funds. The coverage has been financed according to Law 549 from 1999.
Medellin has a number of public companies, but these do not represent a significant burden to the municipality either because they are self-financing or because of their limited budget. Fitch will continue to monitor their financial situation to ensure that they maintain their financial profiles in line with levels registered in recent years.
Rating Sensitivities
An upgrade of the sovereign rating, in conjunction with positive trends in Medellin’s operating performance, could trigger a positive rating action. Future developments that may, individually or collectively, lead to a negative rating action include a significant debt increase (short-term and/or long-term), a substantial deterioration in operating margins, and deterioration of cash levels.