Fitch Rates Telecom Argentina Proposed Sr. Unsecured Notes 'B+(EXP)'/'RR3'
27 APR 2018 11:13 AM ET
Fitch Ratings-Monterrey-27 April 2018: Fitch Ratings has assigned Telecom Argentina S.A. Long-Term Foreign (FC) and Local Currency (LC) first time Issuer Default Ratings (IDRs) of 'B' and 'BB-', respectively. The Rating Outlook for the Foreign Currency Rating is Positive, and the Rating Outlook for the Local Currency Rating is Stable. Fitch has also assigned Telecom Argentina's proposed USD senior unsecured notes issuance a rating of 'B+(EXP)'/'RR3'.
Telecom Argentina's ratings reflect the company's strong business position as a leading integrated telecom operator in Argentina. The company benefits from a solid financial profile, underpinned by its robust operational cash flow generation and conservative capital structure. Telecom Argentina's ratings are tempered by intense competition in Argentina's mature telecom market, as well as the volatile macro-economic environment, which has led to high inflation and sharp currency movements.
The 'B' country ceiling of the Republic of Argentina, which limits the foreign currency rating of most Argentine corporates, has constrained Telecom Argentina's FC IDR at 'B'. The Positive Rating Outlook for the FC IDR is linked to the Positive Outlook of Argentina. Elections during November 2017 improved confidence in the durability of the policies being pursued by President Macri, which bodes well for investment and the sovereign's ability to maintain favourable financing access. The build-up in international reserves and a more flexible exchange rate have improved the country's ability to manage shocks. Country Ceilings are designed to reflect the risks associated with sovereigns placing restrictions upon private sector corporates that may prevent them from converting local currency to any foreign currency under a stress scenario and/or may not allow the transfer of foreign currency abroad to service foreign currency debt obligations.
The 'RR3' Recovery Rating of its proposed senior unsecured notes reflects above average recovery prospects in the event of default given the company's solid balance sheet and cash flow generation. Fitch believes that the company's default, should it occur, would be most likely driven by transfer and convertibility restrictions imposed upon the payment of foreign debt, and not as a result of a material deterioration of the company's business or financial profile. In this case, Fitch's criteria allows for recovery ratings to be assigned above the cap for Argentine issuances of 'RR4'. Fitch's Country-Specific Treatment of Recovery Ratings criteria allows for a one notch uplift for recovery whenever there is a two notch rating differential between a company's foreign and local currency ratings.
Telecom Argentina's proposed issuance of up to USD1 billion would rank pari-passu with existing senior unsecured notes. The tenor of the notes is expected to be up to 10 years and will be held at the parent company level alongside other Telecom Argentina notes. Uses of proceeds are expected to be for capital expenditures, refinancing of short-term obligations, as well as for general corporate purposes.
KEY RATING DRIVERS
Merger with Cablevision Credit Positive: The ratings incorporate the merger between Cablevision S.A and Telecom Argentina S.A, which went into effect Jan. 1, 2018, with the latter being the surviving entity. The combined entity will benefit from increased operating scale, enhanced product offerings, cost reductions and a solid financial profile; all of which will support the merged entity's enhanced market position and cash flow generation. The merger with Cablevision also enhances the diversification of service offering and revenue, within Argentina, which lowers the company's business risk. The rating impact will be limited as the merged entity's ratings are constrained by the Country Ceiling of Argentina at 'B'.
Strong Business Position: Fitch expects Telecom Argentina's solid market position to remain intact over the medium term given its extensive network coverage, quality of service, and strong brand recognition. During 2017, Telecom Argentina's pay-tv market share remained stable at 38% while its merged broadband subscriber market share is expected to be 56%. Fixed and mobile market share is also viewed as strong at 48% and 32% within the country, respectively. The company's pay-TV network spans across 7.8 million homes-passed connecting 6.4 million revenue generating units (RGU). Its pay-tv subscriber base has remained relatively stable at 3.5 million subscribers, while its broadband customer base has grown to 4.1 million subscribers. The merged entity's subscriber base also includes 19.7 million mobile and 3.8 million fixed line subscribers. 38% of the combined entity's revenue came from mobile service, while 23% and 19% came from pay-TV and fixed broadband, respectively.
Mature Telecom Market: Argentina has among the highest penetration rates in Latin America; pay-TV represents a penetration rate of 79%, while mobile, fixed and broadband have penetration rates of 142%, 80%, and 61%, respectively. As a result, growth is limited going forward. Although Telecom Argentina is well positioned to cope with increasing competition given its entrenched business position, Fitch believes that competitive pressures amid market maturity will negatively affect its market shares and operating margins in the long term. Fitch expects Telecom Argentina's growth to come mainly from its broadband segment as the company focuses on cross-selling opportunities within its pay-TV and mobile customer base. The company's HFC network competitiveness is solid against telecom operators, and the broadband penetration rate in Argentina remained relatively lower, at 61%, compared to pay-TV and telephone services, which still offers some growth headroom.
Robust Financial Profile: Telecom Argentina's financial profile is among the strongest of regional Fitch-rated telecom companies across rating categories. The company has historically maintained a conservative capital structure to cope with operational and regulatory risks. Pending successful issuance, Fitch expects the company's pro forma gross and net leverage to be 1.0x and 0.6x, respectively. Fitch's base case is in line with the company's target to increase gross leverage to close to 2.0x in the medium term, which is still viewed as extremely strong for LC IDR rating of BB-. The company's capital intensity, measured as capex-to-sales, is expected to remain close to range from 22% to 24% over the next three years, as the company initiates a plan to invest up to USD5 billion for network upgrades and other corporate expenses. Post-dividend free cash flow during this capital expenditure cycle is expected to range from negative ARS14 billion to negative ARS21 billion.
Moderate Regulatory Environment: The regulatory environment has stabilized in Argentina with the establishment of its new regulatory agency, Ente Nacional de Comunicaciones - ENACOM (National Communications Entity) removing uncertainty for telecom and media operators, including Telecom Argentina. ENACOM was established to fairly regulate the industry. Nevertheless, the regulatory risk remains moderately negative as the changes included the elimination of certain restrictions and loosened regulations to promote market driven competition in an already highly saturated and competitive market, which could lead to the company's weaker market position going forward. Fitch believes that the regulatory framework is unlikely to change, given the already intense competitive landscape and high level of penetration in the Argentine telecom industry.
