Fitch Ratings has assigned a 'BBB-' rating to Empresa Nacional de Telecomunicaciones S.A.'s (Entel) USD800 million proposed senior unsecured notes.

Net proceeds from the notes will be used to finance eligible green and social projects and to refinance 2024 and 2026 Senior unsecured notes (BBB-). Fitch currently rates Entel's Foreign Currency and Local Currency Issuer Default Ratings (IDRs) 'BBB-'/Stable with a National Scale rating of 'A+(cl)'.

The ratings reflect Entel's growth and sustained profitability in Peru, as well as improved operating performance in the core Chilean mobile segment. Fitch expects these dynamics to continue, which should contribute to steady leverage and credit metrics despite high investment requirements. The ratings also reflect Entel's increasingly diverse revenue streams in both countries.

Key Rating Drivers

Profitable Growth in Peru: Entel Peru has continued to achieve strong subscriber share gains, which has translated into higher revenues and EBITDA. YoY growth of 30% in the post-paid subscriber base in 2Q21 drove 19% growth in overall mobile subscribers, reaching 9.5 million. Entel recorded revenues and EBITDA of CLP370 billion and CLP43 billion, respectively, during the first six months of 2021, supported by stable ARPUs and adequate cost control. EBITDA margin of the 1H21 estimated by Fitch of 11.8%, represent an increase over Fitch's projections, an improvement over the 6% in FY2020.

Improvement in Chilean Performance: Entel's Chilean revenues grew yoy by 16% during the first half of 2021 and its EBITDA margin was 34%. The 17% increase in Entel's postpaid subscriber base in 2Q21 compared with 2Q20 and the 3% of increase in prepaid has demonstrated the customers migration to higher-value and recurring plans. This follows several years of declining revenues in the core Chilean mobile franchise, due to high level of competition. A mature WOM S.A. (BB-/Stable) and postpaid penetration above 50% both imply a sustainable four-player mobile environment in Chile despite high levels of competition.

Reduction in Leverage Expected: Improvements in operating performance should contribute to a reduction in gross and net leverage metrics. Fitch expects debt/EBITDA and net debt/EBITDA at or below 2.5x over the rating horizon. These levels are in line with the positive sensitivity and are commensurate with a 'BBB' financial structure (debt/EBITDA of 2.8x). As of LTM June 2021 the leverage and net leverage of Entel, reach 2.8x and 1.9x, respectively.

Investments to Pressure FCF: Fitch expects high investment requirements to fully consume cash flow from operations, driving negative FCF in the near term. Fitch also expects capital intensity of 26% of revenues in 2021, before declining to around 19% by 2023. These investment outlays are mainly due to the development of a new 5G infrastructure network and the 2021 payment of CLP100 billion for allocation of spectrum in the 3.5 Ghz band. The company announced 2021 capex of USD560 billion (USD430 million in Chile, and USD130 million in Peru), and 5G investment plan of USD260 million for 2021-2023 period.

Improving Geographic and Service Diversification: Entel's geographic diversification has improved as a result of the sustainable profitability of its Peruvian franchise. In Chile, Entel's service diversification has also improved as it supplements its core mobile product with a growing fixed-line business. Fitch expects the company to continue growing its fiber-optic network. Entel is well-positioned to benefit from enterprise adoption of 5G.

Derivation Summary

Entel has a leading mobile market position in Chile, backed by strong network competitiveness and brand recognition, which enables stable cash flow generation from the country. Its market position in Peru continues to grow.

Entel's direct domestic competitor, Telefonica Moviles Chile S.A, is rated two notches higher at 'BBB+'/Stable. Entel's financial structure is weaker and has less diversification of cash flow generation from different services.

Entel's financial profile is slightly weaker than that of UNE EPM Telecomunicaciones (Tigo UNE; BBB-/Stable), which has net leverage of below 2.0x and EBITDA margins in the mid-20% range. Tigo UNE also has relatively more balanced cash flow diversification between mobile and fixed services, though Tigo UNE has a weaker competitive position. Compared with Peruvian competitor Telefonica del Peru SAA (BBB-/Negative), Entel has stronger consolidated margins due to the strength of its primary Chilean operations. While Entel's EBITDA generation has improved in Peru, TdP's has stagnated there.

Compared with Colombia Telecomunicaciones SA ESP (BBB-/Stable), Entel has similar profitability and net leverage. Entel benefits from its position as the leading mobile player in Chile, while ColTel has a weaker market position (comparable to Tigo UNE's) and better diversification. While Entel's EBITDA generation has improved in Peru, TdP's has stagnated. Compared with competitor WOM S.A. (BB-/Stable), ENTEL benefits from a more conservative leverage profile, stronger profitability, scale and diversification.

Entel's ratings incorporate a weak linkage with Almendral S.A (A(cl)) due to the absence of financial guarantees and cross-default clauses.

Key Assumptions

Chilean operational revenue with neutral growth in 2021-2023 period, while EBITDA margins decline to 33%;

EBITDA generation in Peru with conservative growth in 2021, reaching EBITDA margin over 10% for the full year;

A dividends policy returning 30% of net income during 2021-2023;

Capital intensity of around 26% in 2021, assuming payments of CLP100 bi for 3.5Ghz bidding (22% excluding this effect), with a reduction to 19% in 2023. Higher organic investments in 5G infrastructure for USD230 between 2021-2023.

RATING SENSITIVITIES

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

Stronger than expected cash flow generation in Peru due to a combination of EBITDA improvement and reduced investments requirements, while maintaining the company's cash flow generation in Chile and measured shareholder returns;

Improving diversification, as Peruvian FCF improves.

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

Total debt/EBITDA sustained above 3.0x or net debt/EBITDA above 2.5x, due to a weakness in Peru, sustained deterioration in Chile, or higher-than-forecast shareholder distributions or investment requirements.

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

New Issuance improved Financial Flexibility: The improved operational performance of Entel and its tower sale has improved its liquidity, which reached CLP527 billion at the end of June 2021. This comfortable liquidity position should provide adequate financial flexibility to manage its investment plans. The proposed new issuance, aimed to refinancing of USD600 million and USD200 million of 2024 and 2026 senior notes, respectively, will improve the duration of its financial debt. After this refinancing the next material debt amortization will be USD133 million of 2024 senior note in 2022. Entel has strong access to capital markets with undrawn lines of credit totaling around CLP200 billion and available bond lines for UF2 million.

Entel's financial debt reached CLP 1.714 bi (USD2.4 bi) in June 2021. Bonds comprise 94.1% of this debt, and bank loans are 5.9%. 70.4% of the total debt was in USD, 24,5% in UF (Local Bonds), 5.1% in CLP and PEN. The company has fully covered this exposure with derivatives.

Issuer Profile

Entel is a Chilean telecommunications operator that provides mobile and fixed line services to consumers and businesses.

Summary of Financial Adjustments

Standard operating lease adjustments;

Operating income adjusted for non-recurring items like asset sales;

FX hedge adjustments made to debt.

Date of Relevant Committee

03 March 2021

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

RATING ACTIONSENTITY/DEBT	RATING

Empresa Nacional de Telecomunicaciones S.A.

senior unsecured

LT	BBB- 	New Rating

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