Fitch Ratings has downgraded the Long-Term Local Currency and Foreign Currency Issuer Default Ratings (IDRs) of VTR Finance N.V. to 'B' from 'BB-'.

Fitch has also downgraded VTR Finance's senior secured USD550 million notes due in 2028 to 'B-'/'RR5' from 'BB'/'RR3' as well as VTR Comunicaciones SpA revolving credit facilities (RCF), senior secured notes of USD480 million (2028) and senior secured notes for USD410 million (2029) to 'B+'/'RR3' from 'BB+'/'RR2'. In conjunction with these moves, Fitch has placed all of the rating on Rating Watch Negative (RWN).

The downgrades reflect the continued deterioration of VTR's fixed business and the weak operating performance of Claro Chile that have resulted in higher forecasted leverage metrics for the combined entities for 2023 than previously projected. They incorporate the limited prospects of deleveraging given intense competition in Chile.

The RWN reflects a high degree of uncertainty surrounding the financial strategy of the joint venture (JV) and its final organizational structure. The RWN and the downgrades reflect our assumption that the servicing of VTR's debt will be primarily, if not exclusively, through cash flow generated by VTR's operations and that the shareholders of VTR and Claro Chile will not inject equity into the JV to strengthen the overall capital structure and liquidity position of the JV. The RWN is expected to be resolved once the finance strategy and legal structure is determined; this could take more than six months to resolve.

Key Rating Drivers

High Leverage: Fitch expects VTR's net leverage to increase to 11x in YE 2022 before declining in the medium term based upon expectations of a slow recovery of operational performance. Fitch forecasts a Net leverage of VTR /Claro Chile combined operations at around 7.5x in 2023, which is substantially higher than Fitch previous expectations and when compared with negative sensitivities for the rating. These forecasts are based on combined net debt of around CLP1.6 billion in 2023, and EBITDA of around CLP 200 billion (19% EBITDA Margin).

Given the high investment needs for 5G and fiber broadband development in the midst of intense competition, the deleveraging capacity of the JV over the next two-three years will not only depend upon attaining merger synergies, but will likely require extraordinary shareholder measures.

Weak Operating Performance: VTR has not been able to halt the loss of clients and the deterioration of its EBITDA margin. The company's broadband subscribers declined to less than 1.2 million from 1.3 million since the start of the pandemic, while its ARPUs declined more than 13% due to pressure related to aggressive offers by Movistar and Mundo Pacifico. As a result of the aforementioned factors, VTR's EBITDA margin has declined to 27% for the LTM ended June 30, 2022 from 40% in 2019, while its EBITDA has declined to a forecasted CLP100 billion in 2023 from CLP260 billion before the pandemic.

Claro Chile's operations have been equally impacted, as its quarterly ARPUs declined to less than CLP3,500 in 3Q22 from more than CLP5,500 before the start of the pandemic and its EBITDA margins dropped to 15% as of 3Q22 from 22% in 2020. Fitch expects Claro Chile's EBITDA will continue to weaken in the near term from the CLP120 billion reported as of the LTM ended Sept. 30, 2022, due to the increasingly competitive mobile market.

Investments Pressure FCF: Fitch forecasts negative FCF generation for the combined operations of VTR/Claro Chile between 2023 and 2025. This is driven by high capex requirements of the JV in order to improve the quality of its services and network competitiveness; the focus will be related to Fiber and 5G development, as the company seeks to maintain healthy organic growth in terms of subscribers in the medium term.

Shareholder Alignment: Uncertainty around the business strategy and capital structure that the JV shareholders will pursue in the medium term is a key credit concern. The merged entity will be 50% owned by Liberty Latin America Group (LLA) and 50% by America Movil S.A.B de C.V (A-). Both are large telecom operators Latin America, but have differences in their business model and capital structures. LLA has a higher appetite for leverage and independent management of each affiliate, with movements of cash around the group for investments and acquisitions. AMX has a strong credit profile due to its solid business position in most markets in Latin America and the low level of leverage it has operated with historically.

Capturing Synergies is Key: The performance of the JV will be closely dependent on the execution of its business strategy and the ability to materialize synergies, estimated by shareholders at around USD140 million within the first three years post completion, mostly related to cost savings from the combination. An additional USD40 million would be captured beyond that timeframe.

Fitch believes cost savings will be mainly related to reducing commercial costs, programming costs, personnel and roaming, among others. However, the company faces meaningful challenges to translate synergies into EBITDA margin recovery, considering the intense competition in the market, and expected ARPU pressure.

Strong Market Position and Diversification Path: The combined operations of VTR/Claro Chile will enhance the companies' market position and product diversification. In a proforma based upon information provided by Subtel as of June 2022, the combined operations will have the leading position in fixed broad band with a 37% market share in terms of subscribers and will have a 40% market share in Pay TV, which is a relatively similar position to that of the main player of the industry, the incumbent competitor, Telefonica Chile S.A. (BBB+/Stable). In the mobile business, the combined operations will consolidate as the third and fourth largest provider of voice and mobile broad band, with shares of 22% and 19%, respectively, with about six million of subscribers.

VTR Finance N.V. has an ESG Relevance Score of '4' for Financial Transparency due to the company's relatively opaque financial disclosure and management strategy, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

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, visitwww.fitchratings.com/esg.

Derivation Summary

VTR's competitive position compare favorably with other speculative-grade telecoms in the region, considering the strong company's diversification after the closing of combined operations with Claro Chile. In spite of that, the deterioration in VTR's operational performance in last periods has become its financial profile as one of the most leveraged in the region.

Compared with sister company Cable & Wireless, VTR combined operation benefits from the Chilean operating environment and its status as first player in fixed broadband service and the largest pay TV operator by subscriber share. Cable & Wireless strong scale, better service and geographical diversification than VTR. Following the AT&T acquisition, LCPR's scale is more than twice that of VTR's, and with greater product diversification.

VTR has a similar fixed-line operating profile to Telefonica Chile (BBB+/Negative), although Telefonica Chile benefits from leverage metrics around 2.0x-2.5x lower than VTR's. Considering the combined business with Claro Chile, new JV VTR/Claro Chile reach a very similar scale and diversification provided by its parent Telefonica Moviles Chile S.A. (BBB+).

Compared with WOM Mobile S.A. (WOM; BB-/Stable), VTR combined operation has better diversification and scale, and similar EBITDA margin. WOM's ratings reflect the company's short but solid track record in Chile, taking on much larger competitors. WOM's ratings, like VTR's, incorporate Fitch's expectations that the company will be managed to moderately high levels of net leverage.

When compared to Millicom International Cellular S.A.'s (BB+/Stable) subsidiaries, Comcel (CT Trust; BB+/Stable) and Telefonica Celular del Paraguay (Telecel; BB+/Stable), VTR has is less diversified and operates in a more competitive market, but in a stronger operating environment. Comcel and Telecel have more dominant market positions and significantly lower net leverage at around 3x and 2x, respectively. Millicom's consolidated net leverage, at about 3x, is lower than LLA's leverage of around 5x. Comcel's and Telecel's ratings reflect a strong linkage with their parent as Millicom heavily relies on these two wholly-owned subsidiaries' dividend upstream to service its debt.

Key Assumptions

Start of the Combined operations VTR /Claro Chile in 2023;

Consider 30% of the projected synergies for 2025;

Claro Chile added, around seven million of mobile customers, and 1.2 million of Fixed Business. Reduction in revenues due to elimination of DTH Service;

Slow recovery on internet subscribers;

Revenue reduction of 13% in 2022 and slightly negative to neutral the following years;

Combined EBITDA margins of around 20%;

Capex in a range of 22% to 18% in 2022-2024 period.

Key Recovery Rating Assumptions

Fitch Criteria consider bespoke recovery analysis for Issuers with IDR of 'B+' and below. The bespoke recovery analysis assumes that VTR would be considered a going concern in bankruptcy and that the company would be reorganized rather than liquidated.

Going-Concern Approach: VTR's going-concern EBITDA of CLP130 billion is based on Fitch's expectation of a sustainable, post-reorganization EBITDA level. This compares with an LTM EBITDA of CLP150 billion and reflects the intense competition in the Chilean market. The EV/EBITDA multiple applied is 5.0x; this figure reflects VTR's sold market position.

Fitch applies a waterfall analysis to the post-default enterprise value (EV) based on the relative claims of the debt in the capital structure. The agency's debt waterfall assumptions consider the company's total debt at June 30, 2022. These assumptions result in a recovery rate for the secured bonds and RCF of VTR Comunicaciones (Opco affiliate) within the 'RR3' range, which, per Fitch's criteria, leads to a one notch uplift to the IDR (B). For structural subordination, the result of recovery analysis of VTR Finance Senior secured debt of USD550 million is a 'RR5', which is one notch below the IDR, resulting in 'B-' rating. Fitch has applied concession allocation payments to VTR Finance debts.

RATING SENSITIVITIES

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

Stabilization of subscriber base and EBITDA margin in the flowing 12 months-18 months, and the ability of JV Combined operation to reach relevant synergies;

Shareholder supports oriented to strength the financial flexibility and reduce the leverage;

Maintain a strong liquidity position;

Positive rating actions are possible to the extent that net debt to EBITDA sustained below 5.0x.

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

The inability to halt the client losses and stabilize its EBITDA margin;

Relevant Deterioration in cash position;

Lack of evidence to return to net debt/EBITDA ratios below 6.0x, in a sustained basis, at VTR.

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

Pressure on Liquidity but Comfortable Debt Schedule: VTR does not face any debt maturities until 2028 (senior secured notes of USD550 million and USD480 million). The issuance of USD410 million (due in 2029) was used to refinance CLP174 million (USD240 million) of term loan and prepay 20% (USD120 million) of VTR Comunicaciones SpA's outstanding 2028 notes.

Despite this schedule, the financial flexibility of VTR shows a relevant decrease in the last quarters, due to the reduction in FCF generation explained by the deterioration in operational performance. The company's cash balance amounted to CLP62 billion by the end of June 2022, which represent 89% the short-term debt of CLP70. Liquidity is further supported by VTR's access to committed credit facilities, which as of June 2022 are completely undrawn.

Issuer Profile

VTR is a relevant Telecom operator in Chilean Market. With around 2.8 million RGUs (1.2 million of internet, 1.0 million of pay TV and 0.5 million fixed telephony), the company is the second largest provider of fixed internet services (with 28% market share), closely following the leader, Telefonica Group (29%), and the largest provider of multi-channel video services with a 30% market share. The company offers its services through HFC (Hybrid Fiber Coaxial) network developed in Santiago and in the main Chilean cities.

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

VTR Finance N.V. has an ESG Relevance Score of '4' for Financial Transparency due to {DESCRIPTION OF ISSUE/RATIONALE}, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.

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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