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Fitch Rates New Telefonica Moviles Chile S.A. 'BBB+' Upon Merger
May 5, 2017 / 4:32 PM / 4 months ago

Fitch Rates New Telefonica Moviles Chile S.A. 'BBB+' Upon Merger

(The following statement was released by the rating agency) CHICAGO, May 05 (Fitch) Fitch Ratings has assigned Inversiones Telefonica Moviles Holdings S.A. (ITMH) Long-term Foreign-currency and Local-currency Issuer Default Ratings (IDR) of 'BBB+' with a Stable Outlook following the company's merger with its subsidiary, Telefonica Moviles Chile S.A. (TMCH). Fitch has also affirmed TMCH's Long-term FC and LC IDRs at 'BBB+' and simultaneously withdrawn the ratings as the entity no longer exists after the merger. Fitch also affirmed Telefonica Chile S.A.'s (TCH) Long-term FC and LC IDRs at 'BBB+' with a Stable Outlook. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS TMCH announced today the completion of the reorganization plan approved by the shareholders on March 22, 2017. Under the plan TMCH merged with its parent, ITMH, with the latter being the surviving entity. Upon completion of the merger, all of TMCH's existing local debt was assumed by the merged entity, and ITMH changed its legal name to Telefonica Moviles Chile S.A. ITMH is a holding company for the Telefonica group in Chile, which also owns 97.9% of the group's fixed-line operator, Telefonica Chile S.A. (TCH, rated 'BBB+'/Outlook Stable). The ratings of the newly merged ITMH (new TMCH) are based on the full consolidated credit profile of the group. TCH and TMCH both have solid financial profiles for a 'BBB+' rating level, and their current ratings already incorporate a degree of financial and operational linkage between them given the, integrated business and financial strategy under the common management and brand unity, as well as sales coverage. This relationship will remain intact, as TCH is now a subsidiary of TMCH following the merger. ITMH's ratings reflect Telefonica Chile group's entrenched leading positions in the Chilean telecommunications market, strong brand recognition and network competitiveness, and sound financial profile backed by solid cash flow generation. Fitch does not foresee any material change to these credit qualities in the short to medium term. Strong Market Positions: TMCH is one of the two dominant mobile operators in Chile, along with Empresa Nacional de Telecomunicationes S.A. (ENTEL), with a 32% subscriber market share as of December 2016, estimated by Subsecretaria de Telecomunicaciones (Subtel). Its high capex to bolster network competitiveness bodes well for its growth strategy, which is focused on mobile data and still has ample room for growth given only 35% of mobile internet penetration of the company's subscriber base. TCH is also the largest fixed-line service provider in Chile, and Fitch expects its strong market position to remain intact over the medium term backed by the company's continued high investments, especially in fiber, to improve service quality. As of December 2016, the company's revenue-generating units amounted to 3.2 million, which was relatively unchanged compared to a year ago as continued fixed-voice customer loss was compensated for by steady increase in broadband and pay-TV subscribers. TCH retained leading market share of 41% in the fixed-voice segment, and the second-largest market shares of 36% and 21% in broadband and pay-TV, respectively, behind VTR Globalcom S.A. during the same time period. Competitive Mobile Market: Fitch expects the competitive landscape of the mobile business in Chile to remain intense as other major mobile operators, including WOM, the new entrant, continue to offer aggressive tariff plans to improve market shares. While this would suppress the company's subscriber base growth, especially in the prepaid segment, and profitability, Fitch expects TMCH's market position to remain relatively intact as its solid network quality and strong brand recognition will help fend off competition to an extent. During 2016, TMCH's revenues fell by 3% with EBITDA margin deteriorating to 26% from 28%, compared to 2015. Stable Fixed-line Operation: Positively, TCH's steady subscriber growth in broadband and pay-TV operations will continue to support stable performance of the fixed-line operations in the short- to medium term despite ongoing contraction in traditional voice service revenues. High-speed broadband and pay-TV services still offer growth headroom in terms of service penetrations, and the company's attractive bundled product offerings should help prevent the churn of the voice customers and protects profitability. Fixed-line services resumed growth in 2016, with revenue improvement of 3% and a stable EBITDA margin of 34%, which was in line with the 2015 level. Solid Financial Profile: Fitch forecasts ITMH's consolidated operational cash flow generation will remain robust at about CLP400 billion annually, which should comfortably cover the annual capex requirements of about CLP300 billion during 2017 and 2018. In the absence of any sizable dividend payments, Fitch forecasts ITMH's FCF margin will be 3%-4% in 2017 and 2018, which will continue to support the company's solid financial profile for the rating category. Fitch forecasts the company's net leverage, measured by total adjusted net debt/EBITDAR, remain in line with the end-2016 level of 1.2x. DERIVATION SUMMARY ITMH's BBB+ rating, based on the consolidated credit profile of the Telefonica Chile Group, is well positioned relative to its regional peers on major comparative. The company holds entrenched leading market positions in Chilean mobile and fixed-line segments, and its robust operational cash flow generation and low leverage compare favorably to other operators in the 'BBB' category, such as Empresa Nacional de Telecomunicaciones S.A. Strong linkage exists between ITMH and its subsidiary, TCH, given a high degree of operational and financial linkages with common management and business strategy. ITMH's ratings are based on the group's consolidated credit profile, including TCH. No country ceiling constraint or operating environment influence was in effect for the ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Slow revenue growth at low-single-digits in 2017 and 2018; -- Consolidated EBITDA margin to remain at around 29% in 2017 and 2018; --Annual capex requirement of about CLP300 billion; --Mid-single-digits Pre-divided FCF margin in 2017 and 2018; --Net leverage of 1.1x-1.2x In 2017 and 2018. RATING SENSITIVITIES An upgrade of ITMH's ratings, which results in more than one notch differential from its parent, Telefonica SA's 'BBB' rating is unlikely given the companies' financial linkage. Negative rating action could be considered in the case of material deterioration of the company's key operating and financial metrics due to intense competition, unfavorable regulatory impact, and higher than expected capex and shareholder distributions - all of which combined resulting in negative FCF generation and net leverage increasing to over 2.0x on a sustained basis. Telefonica Moviles Chile S.A.'s ratings are not directly linked to the ratings of its parent, Telefonica SA (TEF). However, any significant deterioration in the parent's credit profile, to the effect that it results in further rating downgrades or in an increased needs for dividend income for the parent, could place pressure on ITMH's ratings. Fitch currently rates TEF 'BBB'/Outlook Stable. LIQUIDITY Sound Liquidity: ITMH's liquidity profile is sound as its cash balance of CLP221 billion comfortably covered its short-term debt obligation of CLP59 billion, net of its short-term hedge derivatives instruments. Fitch does not foresee any material change in the company's liquidity as its operational cash flow generation remains robust and its debt maturities are well spread out. FULL LIST OF RATING ACTIONS Telefonica Moviles Chile S.A --FC/LC IDRs affirmed at 'BBB+'/ Outlook Stable and withdrawn; --National Long term rating affirmed at 'AA(cl)' / Outlook Stable and withdrawn; --Local debt issuance programme series No. 589, No. 590, No. 813, and No.814 and series F, G, H, I, J, K, L, and M bond issuances affirmed at 'AA(cl)'; transferred to Inversiones Telefonica Moviles Holding S.A. Inversiones Telefonica Moviles Holdings S.A.(New Telefonica Moviles Chile S.A) --FC/LC IDRs assigned 'BBB+'/Outlook Stable; --National LT rating assigned 'AA(cl)'/Outlook Stable; --Local debt issuances transferred from Telefonica Moviles Chile S.A. affirmed at 'AA(cl)'. Telefonica Chile S.A --FC/LC IDRs affirmed at 'BBB+'/ Outlook Stable; --National long-term rating affirmed at 'AA(cl)'/Outlook Stable; --National short-term rating affirmed at 'N1+(cl)'; --Senior unsecured USD500 million notes due 2022 affirmed at 'BBB+'; --Local debt issuance programme series No. 576 and No. 577 and series Q, S, T, U , V , W and X local bond issuances affirmed at 'AA(cl)'; --Affirm National Equity Rating affirmed at 'Primera Clase Nivel 4'. Contact: Primary Analyst Alvin Lim, CFA Director +1-312-368-3114 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Francisco Mercadal Associate Director +56 22 499 3340 Committee Chairperson Daniel Kastholm Managing Director +1-312-368-2070 Date of Relevant Rating Committee: May 4, 2017 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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