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Fitch Affirms Empresa de Telecomunicaciones de Bogota SA ESP at 'BB+'; Outlook Negative
March 1, 2017 / 6:05 PM / 9 months ago

Fitch Affirms Empresa de Telecomunicaciones de Bogota SA ESP at 'BB+'; Outlook Negative

(The following statement was released by the rating agency) CHICAGO, March 01 (Fitch) Fitch Ratings has affirmed Empresa de Telecomunicaciones de Bogota S.A. E.S.P.'s (ETB) ratings as follows: --Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+'; --COP530 billion senior notes due 2023 at 'BB+'; --National long-term rating at 'AA+(col)'. The Rating Outlook remains Negative. KEY RATING DRIVERS The rating actions reflect ETB's continued struggle to curb its ongoing cash flow deterioration, which has pressured its cash and cash equivalent holdings to approximately COP 240 billion as of September 2016, well below the level posted in 2015 (COP 613 billion) and 2014 (COP 1 trillion). The company's cash position deterioration is expected to continue with a projected average negative FCF after dividends of approximately to COP 170 billion pesos in 2017 to 2019. The Negative Outlook reflects Fitch's view that ETB's weak operation and projected negative FCF will lead to increasing leverage in 2017 to 2019, despite recent stabilization in EBITDA generation. ETB's relatively weak revenue performance, limited geographical diversification and a small subscriber base could limit the company's ability to achieve a meaningful EBITDA improvement and deleverage in the short to medium term. Continued leverage deterioration to above 3,5x on a sustained basis in 2017 to 2019, in the absence of material subscriber growth and network penetrations, will result in a further ratings downgrade. Weak Operating Profile ETB's operating profile remains weak following four years of EBITDAR contraction during 2012 to 2015. Although the company was able to rein in further EBITDA deterioration through a modest diversification of its revenue sources and the implementation of cost saving initiatives during the 2016, these efforts were not enough to materially improve its cash flow generation. Fitch forecasts only a modest improvement in the company's cash flow generation in 2017 to 2018 due to slow subscriber growth given a competitive landscape, while its traditional fixed-line copper operation continues to shrink and its mobile business contribution remains marginal. Aggressive Subscriber Growth Target Questionable ETB's business strategy aims to materially increase its Fiber to the Cabinet (FTTC) customers through an aggressive roll-out and penetration of its FTTC network to compensate for the slow penetration of its Fiber to the Home Network (FTTH) in 2013 to 2016. The company's goal is to increase its TV subscriber base on its FTTC network by an average of 72% in 2017 to 2019 while TV and internet subscribers connected to its FTTH network are expected to grow by an average of 26% and 22% respectively during the same period. The company expects its B2B business' revenues to grow at an average rate of 7% per year during the projection period, a target that may be difficult to realize following the steep contraction of 12% in 2016. Although ETB expects to successfully execute its business strategy to grow its revenue base by an average of 10% during the projection period, Fitch remains cautious about the ability of ETB to improve its revenue base in this magnitude. Fitch projects an average revenue growth in the low single digits and a lower subscriber growth rate than the company's target given the tough competitive pressures expected in the sector in coming years. Fitch believes that the current competitive environment and operational challenges faced by the company in the near term, especially in 2017 given challenging macroeconomic conditions and weakening consumption due to the tax reform, would make it difficult for the company to achieve its stated goals. Challenging Operating Environment ETB faces strong competitive pressures in Bogota, which could hinder material ARPU improvement for its key service offerings while the ongoing fixed-mobile substitution trend continues to weaken ETB's core fixed voice operation, which still is one of its main cash generation businesses. Slower than expected service quality improvement could limit its ability to reduce churn rates and materially grow its subscriber base through the planned expansion of non-traditional services. As a result, Fitch expects ETB's continued limited diversification in geography and service revenues to prevent it from achieving a larger business scale thus limiting its ability to turn around the deterioration in its cash flow generation capacity. Continued Negative FCF Fitch forecasts continued negative FCF generation during 2017-2019 despite ETB's lower capex budget. ETB's 2016 capex is estimated 50% lower than the 2015 level of COP854 billion, which will not be covered by its reduced CFFO generation. ETB plans to execute a capex program equivalent to an average capex intensity of 26% in 2017 to 2019 to shore up its home and mobile businesses to achieve a meaningful revenue diversification. Negatively, Fitch projects ETB's CFFO to average COP 285 billion during this period, which will be insufficient to meet its reduced capex expenditure. As a result, Fitch estimates ETB to post an average negative FCF of approximately COP170 billion per year during this period. Increasing Leverage Fitch expects ETB's leverage metrics to deteriorate in the short to medium term due to persistent negative FCF generation which will require the company to incur additional debt for an aggregate amount of COP 400 billion in 2017 to 2018. The company's adjusted debt will also be impacted by its efforts to increase its footprint in the 4G/LTE segment for its mobile business, which results in an incurrence of rental expenses of approximately 8% of projected revenues, which Fitch incorporates as adjusted off-balance-sheet debt. As a result, Fitch estimates the company's total adjusted debt to reach close to COP 1.3 trillion by 2017, COP 1.5 trillion by 2018 and COP 1.7 trillion by 2019. The increased debt level, in conjunction with an expected moderate EBITDA performance of approximately COP350 billion a year will drive the company's net leverage, measured by total adjusted net debt to EBITDAR, to 2.6x in 2017, 2.9x by end-2018 and 3.2x by end-2019 which unfavourably compares to just 0.2x at end-2014 and 1.8x at end-2015, respectively. A further deterioration in the leverage metrics over 3.5x in a sustained manner could lead to further negative rating actions. KEY ASSUMPTIONS --Revenues grow at a 1.6% average per year in 2017 to 2019; --CFFO averages approximately COP 285 billion per year below average capex needs of COP390 billion per year in 2017 to 2019; --Projected negative FCF, compounded by average dividend distributions of COP 66 billion/year require to contract new debt; --ETB contracts new loans for up to COP 400 billion in 2017 to 2018 to finance its capex program; --Adjusted net debt averages 2.9x in 2017 to 2019 and ends at 3.2x at FY 2019. RATING SENSITIVITIES Considerations that could lead to a negative rating action (Rating or Outlook): --Relatively weak network penetration; --Inability to improve EBITDA performance in a meaningful magnitude; --Further deterioration in FCF generation; --Sustained increase in adjusted net leverage above the 3.5x in a sustained basis. A positive rating action is unlikely given the increase in leverage and expectation of negative FCF over the next few years. LIQUIDITY ETB's liquidity profile continued to weaken despite its efforts to implement austerity measures and meaningful capex downsizing to preserve cash. ETB was not able to reverse the cash balance erosion trend, which started since 2014 due to continued negative FCF generation. The company's cash and liquid investment holdings are expected to close 2016 at approximately COP 270 billion, well below the level posted in 2015 (COP 613 billion) and 2014 (COP 1 trillion). Positively, ETB does not face any material debt maturity until 2023 when its COP530 billion notes become due. FULL LIST OF RATING ACTIONS Fitch has affirmed Empresa de Telecomuncaciones de Bogota S.A. E.S.P.'s ratings as follows: --Foreign Currency IDR at 'BB+', Outlook Negative; --Local Currency IDR at 'BB+', Outlook Negative; --Bond rating at 'BB+'; --National Long-Term Rating at 'AA+'(col), Outlook Negative. Contact: Primary Analyst Alvin Lim, CFA Director +1-312-368-3114 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Julio Ugueto Associate Director +571-484-6770 Ext. 1038 Committee Chairperson Daniel R. 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