Fitch Ratings has upgraded ATP Tower Holdings, LLC's senior secured notes to 'BB' from 'BB-'.

The upgrade corrects an error in the application of the Long-Term Foreign Currency Issuer Default Ratings to the senior secured notes at the time of the last review on April 11, 2023.

Key Rating Drivers

High Leverage: ATP's net leverage is expected to end 2023 at 8x as its capex roll-out accelerates over the next two years. This compares to the 8.9x leverage of 2022. Contracted fiber deployment and tower site builds should contribute to EBITDA expansion during 2023 and into 2024. Fitch expects net leverage to decline to close to 7.0x in 2024.

Increasing Competition: ATP's ratings are constrained by its small size when compared with most peers in the independent infrastructure space. Competition in the telecom infrastructure business has continued to increase with larger rivals growing both organically and inorganically. Phoenix Tower International entered the Chilean market after acquiring 3,800 towers in Chile from WOM S.A. Increasing competition in the country could lead to slower tenant acquisition in the medium term. American Tower Corporation along with America Movil's tower spin-off, Sitios Latinoamerica, are large competitors with wide tower infrastructure coverage in Latin America.

Rapid Growth: ATP's EBITDA should continue to grow at double digits as the company expands fiber and tower infrastructure. EBITDA is expected to grow to USD60 million in 2023 from USD45 million in 2022 and USD34 million in 2021. Projected growth is mainly the result of inflation escalators, fiber to the home (FTTH) contracts in Colombia and growth in Chile. These figures are adjusted for Fitch's lease criteria, which does not add back lease depreciation or interest.

Low Sector Risk: The tower industry carries minimal risk related to tower obsolescence or technology. The wireless operator deploys all the electronics and antenna platforms, while the tower operator is responsible for the physical site. Also contributing to the stability of the tower business is the lack of robust alternative technologies. The only available alternative capable of broad geographic coverage-satellite transmission-is ineffective indoors, affected by obstructions and degrades in severe weather conditions.

Long-Term Growth Opportunities: Demand for data capacity continues to grow rapidly. Wireless companies have been densifying their 4G LTE networks, which increases the network capacity, and are implementing technological evolutions to increase speed and capacity. Mobile broadband services remain a key factor in future revenue and cash flow growth for the tower industry. The development of 5G in Chile in the near term and in Peru and Colombia long term should support tower demand although disposable income, particularly, in the latter two countries limits return on capital and could limit operator network investments.

Counterparty Risk: ATP benefits from contracts with its clients that are typically 10 years in initial length. The average remaining life of its contracts is approximately six years for towers and eight years for fiber. These contracts mitigate volume and price risk and are positively factored into the ratings. Client concentration is high, particularly to Telefonica SA. Its subsidiaries in Peru and Chile have lost market share in recent years. Fitch recently downgraded Telefonica del Peru to 'BB-'.

Derivation Summary

ATP and other digital infrastructure operators have operating profiles with high visibility and stability of rental income based on passive infrastructure and long-term contracts, offset by underlying asset specificity that affects liquidity of sale. The tower industry employs a stable business model and experiences much lower business risk than many business models within the telecommunications segment.

The North American wireless telecom tower industry is dominated by American Tower Corporation (BBB+/Negative) and Crown Castle International Corp. (BBB+/Stable). These operators have better business profiles than ATP due to larger scale, more diversification, and exposure to a more stable and mature telecommunications industry. Operadora de Sites Mexicanos, S.A. de C.V. (Opsimex; BBB/Positive) also has stronger business and financial profiles than ATP, and benefits from its dominant market position in Mexico, favorable relationship with America Movil, and a track record of consistent deleveraging.

In addition to its small size and greater emerging market exposure, ATP's relatively short track record and ambitious growth plans limit the rating. The company's EBITDA net leverage metrics are consistently higher than global peers and are most closely in line with European operator Cellnex Telecom S.A. (BBB-/Stable). However, Cellnex's elevated leverage metrics are supported by a much larger business scale and more mature operating environment.

Indonesian peer's PT Profesional Telekomunikasi Indonesia (Protelindo; BBB/Stable) and PT Tower Bersama Infrastructure (TBI; BBB-/Stable) are medium-sized players with business profiles that are more in line with ATP. However, these issuers are much stronger than ATP financially, boasting lower leverage metrics and much higher profitability.

Key Assumptions

Revenue growth from about USD110 million in 2022 to around USD150 million in 2024;

EBITDA margins improving from around 40% to around 55% as improving tenancy drives economies of scale;

Capex around USD100 million in 2023 and USD110 million in 2024 and 2025;

Net debt to EBITDA ratio around 8.0x in 2023 and close to 7.5x in 2024;

No dividend distributions.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Stronger than expected revenue growth over the medium term, driving EBITDA margins over 60%;

Net leverage sustained below 6.5x;

Neutral FCF.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

A delay or inability to execute business plan as envisioned;

Revenue growth in the medium term slowing to the mid-single digits, with EBITDA margins of around 50%;

Net leverage sustained above 7.5x;

The loss of a major tower tenant, while unlikely, could drive a downgrade of the ratings.

Issuer Profile

ATP Tower Holdings, LLC is a privately-owned provider of digital and telecommunication infrastructure in the Andean region, with operations mainly in Colombia, Peru and Chile. ATP owns, operates, manages, and leases telecommunications towers, rooftops, small cells, distributed antenna systems (DAS), optical fiber networks & nodes, and C-RAN solutions.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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