Fitch Ratings has affirmed Empresa Nacional de Telecomunicaciones S.A.'s (Entel) ratings at 'BBB-', including the Long-Term (LT) Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) and USD1.8 billion senior unsecured notes.

Fitch has also affirmed Entel's National long-term rating at 'A+(cl)'. The Rating Outlook on the IDRs and National Long-term rating has been revised to Stable from Negative.

The stabilization reflects 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. Growth of 20% in the post-paid subscriber base drove 7% growth in overall mobile subscribers, reaching 8.8 million. In FY2020, Entel recorded revenues and EBITDA of CLP685 billion and CLP41 billion, respectively, supported by stable ARPUs and adequate cost control. These compare favorably to 2019 revenues and EBITDA, which Fitch estimates at CLP486 billion and CLP2 billion. While the Peruvian Sol appreciated against the Chilean peso, YoY margin improvements (6% vs .4%) in a lockdown year support the stabilization of Entel's Outlook.

Fitch expects further growth in the coming years as Entel consolidates its 24% market share in Peru and grows to 10 million customers. Reductions in acquisition costs and improved scale should contribute to EBITDA margins of around 10%.

Chilean Stabilization: In 2020 Entel's Chilean revenues grew by 5%, while maintaining an EBITDA margin of 33%. A 16% increase in Entel's postpaid subscriber base offset a 15% decrease in the prepaid segment as customers migrated to higher-value and recurring plans. This follows several years of declining revenues in the core Chilean mobile franchise, where competition has been high since the entry of WOM S.A. (BB-/Stable). The 'Entel Hogar' fixed segment customer base increased 6% due to higher data demand from the pandemic lockdowns. A mature WOM and postpaid penetration above 50% both imply a sustainable four-player mobile environment in Chile despite high levels of competition.

Steady Leverage, Manageable Amortization: Improvements in operating performance should contribute to a reduction in gross and net leverage metrics. Fitch expects Debt / EBITDA and Net Debt / EBITDA 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).

Entel benefits from a manageable amortization schedule and low refinancing risk. The next major debt maturity is its USD333 million note in 2022 (the first of three such amortizations in 2022 - 2024). Entel has sufficient liquidity to redeem the first maturity following the conclusion of the tower sale transaction.

Investments to Pressure FCF: Fitch expects high investment requirements to fully consume cash flow from operations, driving negative free cash flow 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. Fitch estimates the yearly organic investment levels for the 5G network are estimated in a range of CLP 55-65 billion pesos.

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.

Equity Rating: Entel's equity rating is based on the company's credit profile, its long track record in the stock market, a 45.1% of free float and a market presence of 100%. Entel also reports market capitalization of USD2.0 billion as an important player in the Santiago stock market and high levels of daily trading volume that averaged USD1.1 million over the last month (as of March 2021).

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 profile is materially weaker and has less diversification of cash flow generation from different services.

Entel's financial profile is also weaker than UNE EPM Telecomunicaciones (Tigo UNE, BBB), which has adjusted net leverage of around 2.5x. Tigo UNE also has relatively more balanced cash flow diversification between mobile and fixed services, though UNE EPM is approximately half the size of market leader America Movil S.A.B. de C.V.'s (A-/Stable) Claro Colombia. Compared with Peruvian competitor TdP, 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. Compared with competitor WOM S.A. (BB-/Stable), ENTEL benefits from a more conservative financial profile, 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

Fitch's Key Assumptions Within Our Rating Case for the Issuer Include:

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 of around USD60 million (CLP48 Bi);

A dividends policy returning 30% of net income during 2021-2023 and with approximately CLP25 billion distributed in 2021;

Capital intensity of around 26% in 2021, assuming payments of CLP100 bi for 3.5g bidding (22% excluding this effect), with a reduction to 19% in 2023. In 2021, higher organic investments in 5G infrastructure for CLP65 Bi (CLP50 in Chile and CLP15 Bi in Peru).

RATING SENSITIVITIES

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

Total Debt / EBITDA sustained below 2.5x and/or Net Debt / EBITDA close to 2.0x

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

Improved Liquidity, Manageable Amortization: Entel's tower sale improved its liquidity, which reached CLP 589 billion (USD808 million) at the end of 2020. This should provide adequate financial flexibility to manage its investment plans. 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 1.747 bi (USD2.4 bi) in 2020. Bonds comprise 94.1% of this debt, and bank loans are 5.9%. The decrease from 2019 (CLP 1.812 Bi) is mainly due to payments on the Banco Estado Loan for CLP 49.2 Bi and payment of CLP10 Bi on the Scotiabank Credit. The reduction in bank debt was partially offset by Entel Peru's new credit for CLP1.9 Bi.

As of December 2020, 72% of the total debt was in USD, 25.1% in UF (Local Bonds), 2.8% in CLP, and 25% in UF (unidades de fomento). The company has fully covered this exposure with derivatives.

SUMMARY OF FINANCIAL ADJUSTMENTS

Standard operating lease adjustments;

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

FX hedge adjustments made to debt.

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		PRIOR
Empresa Nacional de Telecomunicaciones S.A.	LT IDR	BBB- 	Affirmed		BBB-
	LC LT IDR	BBB- 	Affirmed		BBB-
	Natl LT	A+(cl) 	Affirmed		A+(cl)
	Nat Equity Rating	Primera Clase Nivel 2(cl) 	Affirmed		Primera Clase Nivel 2(cl)

senior unsecured

	LT	BBB- 	Affirmed		BBB-

senior unsecured

Natl LT	A+(cl) 	Affirmed		A+(cl)

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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