Fitch Ratings has affirmed the foreign- and local-currency Issuer
Default Ratings (IDRs) of Telemovil El Salvador, S.A. (Telemovil) and
Telemovil Finance Co. Ltd (TF) at 'BB'. The Rating Outlook is Stable.
Fitch has also affirmed USD310.6 million senior notes due 2017 issued by
TF at 'BB'.
At the same time, Fitch has withdrawn the IDRs of TF as the entity is
not considered analytically meaningful for the credit quality of the
notes which have been issued out of it and fully guaranteed by Telemovil.
Telemovil's ratings reflect its diversified service offering, leading
positions in the mobile and pay television segments in El Salvador,
strong brand recognition, extensive network coverage, and moderate
leverage for the rating category. The company's credit quality is
tempered by a persistently high level of competition which continues to
weigh on its market share and cash flow generation.
The ratings also factor in Telemovil's strong linkage with its parent,
Millicom International Cellular S.A. (MIC) (rated 'BB+' by Fitch), which
helps Telemovil to achieve synergies related to the larger scale of the
parent and provides expertise in management. It also considers the
payment of dividends and royalties to MIC and Telemovil's limited
ARPU Decline Continues:
Telemovil's revenue growth is likely to remain weak in 2014 and 2015,
following a 1% contraction in 2013, due to the continued erosion in
mobile ARPU against the backdrop of the intense competition and mature
industry conditions, as the penetration rate was approximately 120% at
the end of June 2014. The company's mobile strategy is centered on
mobile data revenue growth which is expected to offset further possible
declines in voice revenues. In addition, aggressive tariff-based
strategies from competitors could prevent any meaningful recovery in
Telemovil's market share; market share has fallen to 36% at the end of
second quarter 2014 (2Q'14) from 40% in 2013.
Fitch forecasts Telemovil's EBITDA margin will trend down below 30% over
the medium term due to continued pressures from competitors. The revenue
mix will become even more unfavorable as the lucrative mobile voice
revenues gradually decline while marketing costs, including handset
subsidies, continue to increase, and the contribution from the lower
margin fixed-line businesses grow. Telemovil's EBITDA margin fell to 31%
during 2013 from 36% in 2013, as calculated by Fitch.
Strong Growth in Other Segments:
Positively, Telemovil's non-mobile segments, including pay-TV,
broadband, and B2B solutions, which together accounted for 32% of total
revenues in 2013, continued to grow strongly and this trend should
continue over the medium term given the still low penetration of these
types of services. Telemovil's offering of bundled services, with the
newly launched Direct-To-Home TV, should help ward off the competitive
threats to a certain extent and mitigate negative growth in the mobile
By 2017, Fitch expects the company's non-mobile segment is expected to
account for almost 40% of total sales. Mobile finance solutions will
remain the fastest growing segment in he company, with double-digit
annual revenue growth, yet its earnings contribution will still be small
over the medium term.
Positive Pre-Dividend FCF:
Telemovil should be able to maintain its positive pre-dividend free cash
flow (FCF) generation over the medium term despite the increasing capex
amid weak EBITDA growth. The company plans to increase capex by
approximately 20-30% from the 2013 level, which will represent about
14%-15% of revenues during the period, primarily for 3G/Long Term
Evolution (LTE) coverage and capacity, as well as for pay-TV and
fixed-line services. The increase in capex should be covered by the cash
flow from operations (CFFO) before dividends over the medium term.
In addition, dividend payment has decreased significantly, by about 75%
from the 2010-2012 levels. Any significant increase in the shareholder
distribution over the medium term should be limited given the company's
large investment plans. In Fitch's view, Telemovil's upstream payment to
the parent, aside from the regular royalty fees, could be flexible
depending on its financial condition and the operational outlook.
Telemovil's financial net leverage, measured by adjusted net
debt-to-EBTIDAR, is forecast to remain above 2.5x over the medium term
as EBITDAR in absolute terms will be relatively stable. This figure
compares with 2.3x and 1.9x at the end of 2013 and 2012, respectively.
Excluding the lease adjustment, the company's net debt-to-EBITDA was
1.7x at end-2013.
The company's gross leverage will decrease to close to 3.0x during 2014
from 3.7x at the end of 2013 as the company has successfully completed
its partial tender offer of USD139 million on its USD450 million bond
due 2017 in April 2014.
The company's liquidity profile is good as it does not face any debt
maturities until 2017. Telemovil held USD206 million of readily
available cash as of March 31, 2014.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Deterioration in the company's EBITDA and FCF generation along with
weak revenue growth due to competitive pressures and such. factors as
material loss in mobile market share, ARPU erosion, and substantial
increase in marketing expenses;
--Worse-than-expected negative impact of the introduction of number
portability and higher-than-expected auction prices for 4G spectrums;
--Change in MIC's financial policy, including larger cash upstreams from
its subsidiaries, or any significant deterioration in the parent's
Adjusted net debt-to-EBITDAR above 3.0x in conjunction with a weak
liquidity profile on a sustained basis.
Positive: While ratings upgrades are not likely in the short- to
medium-term due to the competitive operating environment, future
developments that may, individually or collectively, lead to a positive
rating action include:
--Reductions in net leverage below 2.0x on a sustained basis, driven by
improved service diversification, enhanced market position, positive
change in the competitive/regulatory environment, and/or explicit
support from its parent MIC.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', May 28, 2014
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
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