Fitch Ratings has downgraded
In addition, Fitch has downgraded the senior unsecured bond of TMCH to 'BBB-' from 'BBB'. Fitch has also affirmed National Long-Term ratings and national senior issuances of
The downgrade reflects a continuation of weak profitability and FCF, driven by a persistently difficult competitive environment in the telecom sector in
Key Rating Drivers
Leverage Deterioration: TMCH's leverage continues to deteriorate, driven by reductions in EBITDA margins, higher connectivity service expenses in line with fiber optic growth and average revenue per user (ARPU) reductions. Fitch expects net leverage to remain elevated in 2023 at 3.1x (including the adjustment for receivables factoring) and show modest reductions going forward, derived from improvements in EBITDA margin, a reduction of capex intensity and minimal dividend distributions. Fitch expects the company's net leverage to show some improvements by 2025 but remain above 2.5x, consistent with a 'BBB-' rating. On a lease-adjusted basis, Fitch expects net leverage to be 4.1x in 2023 from 3.9x in 2022, trending toward 4.0x over the medium term.
Reduced Profitability: Despite the positive evolution of revenues with increases in the mid-single-digits in recent years, TMCH's Fitch-defined EBITDA margins fell to 15.9% in 2022 and 13.6% in the LTM ended
Challenging Mobile Environment: Fitch expects the mobile segment to grow modestly over the coming years as competition remains fierce in the four-player Chilean market. Mobile service revenues fell 1.1% in 2022. Fitch expects modest growth of 2.5% in 2023 due to the slight increase in customer base and growth in ARPU of approximately 2% from tariff adjustments to reflect high inflation and mix shift to postpaid from prepaid. While competitors WOM and Entel have made similar moves in inflation indexation, it remains unclear if Claro will follow suit as the operator has lost subscriber market share over the past two years.
Lower Capex Intensity and Dividends: TMCH's FCF should gradually improve due to decreasing capex levels, which Fitch expect to be around 11.5-13.0% over revenues for the 2023-2026 period (compared with 23% in 2021). This reduction is based on the end of a strong investment period in 5G network infrastructure committed in the bidding process and an expected reduction in fiber's expansion capex, now under Infraco's responsibility. Despite this, Fitch expects potential outflows of TCH to support part of Entel's fiber acquisition by Infraco (40% of TCH property) after approval by the antitrust authorities. In addition, Fitch expects the company to maintain a conservative dividend policy in the medium term.
Leading, Diversified Competitive Position: TMCH's diverse revenue streams offset its lack of geographic diversification, and it has solid market share in the fixed and mobile segments. TMCH is the second-largest mobile provider (26% of subscriber market share) and TCH is the largest broadband (32%) and second-largest pay TV (21%) provider in the country. Key competitors ENTEL (BBB/Stable) and WOM (B+/Negative) are focused on the mobile segment and
Broadband Drives Growth: Fixed-segment revenues have grown rapidly in recent years, driven by market share gains in broadband and pay-TV subscribers. Supported by its market-leading fiber broadband service offering, the company has surpassed VTR to become the industry leader in broadband internet. Furthermore, bundling offers and a strong IPTV product have allowed the company to grow its market share in pay-TV. While competition in fiber should increase as competitors expand their own fiber networks, Fitch anticipates that TCH will maintain its strong position in fixed telecom services. With broadband penetration in
Parent Subsidiary Linkages: TMCH and TCH have similar standalone credit profiles. Fitch equalizes the companies' ratings, given the shared operational and administrative functions, along with the material dividend remittances from TCH up to TMCH. The complementary nature of the companies' product portfolios further supports Fitch's assessment of strong strategic linkages. TCH and TMCH have weaker standalone credit profiles compared to their ultimate parent
TCH's Equity Rating: TCH's listed stock accounts for less than 1% of the company's equity. The rest is held by TMCH. The equity rating for TCH is Level 4(cl), given the low level of free float due to the majority stake ownership by TEF. This is mitigated by its solid solvency and long history in the Chilean stock market.
Derivation Summary
Compared with
Compared with domestic competitors
TMCH's leverage trend and FCF also compare favorably with sister companies
Key Assumptions
Mobile subscribers remaining near 8.0 million as the company's post-paid penetration continues to increase; slight recovery of blended mobile ARPU (service + handsets) to
Fiber homes passed increasing to around 4.3 million by FY 2024, with take up rate (homes connected/homes passed) near 35%, while pay-tv and fixed voice decline
Overall revenues growing in the low-single digit level. Growth is mainly driven by slight gains in ARPU growth
EBITDA margins below historic averages, in the range of 14% to 15% in the 2023-2026 period;
Capex intensity declining to a range of 11.5-13% level over revenues. Potential impacts on outflow related to support of Entel's Fiber Network acquisition by Infraco.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Net leverage improving to levels below 2.5x;
Improving profitability and achieving sustainable positive FCF generation while maintaining the company's market position.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A deterioration in market position due to competition and/or regulation, resulting in persistent negative FCF generation and impossibility to return to net leverage of 3.5x or lease-adjusted net leverage of 4.5x in the medium term;
A higher degree of financial integration between the units of Telefonica HISPAM (
Excessive shareholder distributions, including from cash flow from operations or from additional asset sale proceeds being distributed to the parent company. Increase in capex intensity to levels materially exceeding Fitch expectations.
Liquidity and Debt Structure
Adequate Liquidity:
Issuer Profile
Summary of Financial Adjustments
Adjustments of hedge currency derivatives on financial debt;
Adjustments for leasing;
Adjustments of factoring.
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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