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Fitch Affirms Comcel Trust at 'BB+'; Outlook StableFitch Ratings has affirmed the long-term foreign currency and local currency Issuer Default Ratings (IDRs) for Comcel Trust (Comcel) at 'BB+'. The Rating Outlook is Stable. Fitch has also affirmed Comcel's USD800 million senior unsecured notes at 'BB+.' Comcel Trust (Comcel) is a special-purpose vehicle (SPV) created in Cayman Island to issue USD 800 million senior unsecured notes on behalf of Comcel Group (Comcel), a group of several legal entities providing primarily mobile telecommunication services under the Tigo brand. The ratings of the trust are based on the combined credit profile of Comcel, of which entities jointly and severally guarantee the note on a senior unsecured basis. While the company's operational fundamentals and key financial metrics are stable, the ongoing investigation regarding the improper payment on behalf of Comcel, as disclosed in October 2015 by its parent company, Millicom (News - Alert) International Cellular S.A. (MIC, rated 'BB+'/Stable Outlook) is credit negative. The timeline or the magnitude of the potential impact stemming from this issue remains largely uncertain at the current juncture. Fitch will closely monitor and take an immediate action, if necessary, when details become available. KEY RATING DRIVERS Leading Market Position Comcel is the largest mobile operator in Guatemala, with a subscriber and EBITDA market share of 55% and 64%, respectively, as of Sept. 30, 2015. The company's entrenched market position is supported by its extensive network coverage, stable quality of service and strong brand recognition under the "Tigo" name. The company is 55% owned by MIC. Fitch Ratings expects Comcel's competitive advantage, partly supported by MIC's industry expertise, to remain intact and help ward off competitive pressures to an extent over the medium term. Slow Mobile Revenue Growth Fitch forecasts that Comcel's top-line growth could be slow, in the low single digits over the medium term, given the maturity of the Guatemalan mobile industry with a penetration rate of 124% as of December, 2015. While continued erosion in its traditional voice revenues is unlikely to be curbed, the strong demand for mobile data, and resultant steady growth in data revenues should help offset this negative impact. Fitch expects that growth in data revenues will continue to be supported by increasing smartphone and data plan adoption rates, estimated to be about 53% and 57% at the end of 2015, respectively. During 2015, the company generated over 83% of total revenues from their mobile segment. Fixed Line Growth Revenue contribution from Tigo Home segment, mainly fixed broadband and cable TV, is likely to undergo strong double digits revenue growth over the medium term given Comcel's increasing network coverage expansion and strategy to consolidate the market by acquiring smaller players. The segment remains relatively underpenetrated and highly fragmented which should provide Comcel with ample room to pursue both organic and inorganic growth. Fitch expects the revenue proportion of Tigo Home segment out of the total sales to increase to above 7% over the medium term, from about 4.2% in 2015. Margins Falling but Still Strong Comcel boasts one of the highest operating margins among the telecom operators in the region with its EBITDA margin of 51% in the LTM ended Sept. 30, 2015. Fitch forecasts the company's EBITDA margin to trend down toward 48% over the long term due to ongoing ARPU erosion and competitive pressures, as well as a revenue mix change with an increasing contribution from lower margin fixed-line and equipment sales. Despite the decline, Fitch acknowledges that the forecasted EBITDA margin, in the range of 48% - 50% during 2015 - 2018, still compares favorably to its regional peers. Moderately Low Leverage Fitch expects Comcel to maintain moderately low leverage for the rating category, with its net debt to EITDAR at around 1.6x over the medium term, backed by solid operational cash generation. Fitch does not foresee any material improvement in the company's financial profile due to the aggressive shareholder return policy in the medium term. Despite solid cash flow from operations (CFFO), estimated to be above USD500 million which fully covers annual capex of about USD175 million, dividend payments could continue to pressure Comcel's FCF generation into the negative territory. Benign Regulatory Environment The Guatemalan telecom industry has limited regulation, as evidenced by the absence of material intervention in market competition, and/or asymmetrical regulation imposed by the regulatory body. Tariff policies are not subject to the regulatory review, and the interconnection rates are set by private contracts, all of which benefit the incumbent operator. In addition, there is no regulation on number portability. Fitch sees no indication of an adverse change in the regulatory stance that could materially affect operational landscape of Comcel in the near term, which would allow the company to continue to develop business strategies utilizing its largest-scale benefit to maintain its market position. KEY ASSUMPTIONS --Low single digit revenue growth over the medium term; --Fixed broadband and cable TV to undergo strong double digits revenue growth over the medium term given Comcel's increasing network coverage expansion and strategy to consolidate the market by acquiring smaller players; --EBITDA margin to decline towards 48% by 2018 due to margin erosion; increasing contribution from lower margin fixed-line and equipment sales; --Capex-to-sales ratio estimated to be at around 14% in the short to medium term; --Negative FCF generation to remain in the short- to medium term given high dividends; --Net leverage to remain at around 1.6x-1.7x over the medium term. RATING SENSITIVITIES Comcel's rating is closely linked to that of MIC given its strong financial and strategic linkage with the parent. As such, any negative rating action on MIC would also negatively affect Comcel's ratings. Also, a negative rating action could be considered if net debt-to-EBITDAR increases to above 3.0x without a clear path to deleveraging due to any of the following: deterioration in MIC's financial profile leading to more aggressive shareholder distributions, weaker cash generation due to competitive or regulatory pressures on its operations, and M&A activity. Also, any potential material financial impact from the ongoing investigation regarding the improper payment would pressure the ratings. Any positive rating action is unlikely given the aforementioned linkage with MIC, which is also rated at 'BB+', while its foreign currency rating is capped by the country ceiling of Guatemala. LIQUIDITY Comcel has a solid liquidity profile backed by its stable cash flow from operation (CFFO) and well-spread debt maturities. The company refinanced all of its bank loans with the proceeds of USD800 million senior unsecured notes issued during 2014. During 2015, the company also issued a 10 year local currency bank loan for an equivalent of US200 million to improve liquidity, and to fund its capex working capital requirements. Comcel does not face any debt maturity until 2024. Additional information is available on www.fitchratings.com. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997660 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997660 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. View source version on businesswire.com: http://www.businesswire.com/news/home/20160108005870/en/ |
