TEXT-S&P rates Telefonica Chile notes 'BBB'
(The following statement was released by the rating agency) Overview -- Chile-based telecommunications company Telefonica Chile plans to issue senior unsecured notes for to $500 million. -- We are assigning our 'BBB' issue rating to these notes. -- We are affirming our 'BBB' corporate credit rating on the company. -- The negative outlook on the company mirrors the negative outlook on Telefonica S.A., given its considerable control over its subsidiary's business strategy and financial policy. Rating Action On Oct. 3, 2012, Standard & Poor's Ratings Services assigned its 'BBB' senior unsecured debt rating to Telefonica Chile S.A.'s proposed senior unsecured notes for up to $500 million. At the same time, we affirmed our 'BBB' corporate credit rating on the company. The outlook remains negative. We expect the company to use net proceeds for debt refinancing and for general corporate purposes. Rationale The ratings on Telefonica Chile reflect its position as a leading telecommunications provider in the low-risk and growing Chilean market, efficient operations, and operating support from its parent, sound profitability, and solid cash flow protection measures. These strengths mitigate the competitive pressures in the industry, the decreasing revenues and margins in fixed telephony, and the company's narrow geographic diversification. We assess Telefonica Chile's business risk profile as "satisfactory" and its financial risk profile as "modest." We view the company's credit quality as intertwined with that of its sister company, Telefonica Moviles Chile S.A. (BBB/Negative/--), because of a high degree of integration between the two companies. Therefore, we follow a consolidated approach to the rating. Spain-based Telefonica S.A. (BBB/Negative/A-2) owns 97.89% of Telefonica Chile and 100% of Telefonica Moviles Chile. Given Telefonica's considerable control over both subsidiaries' business strategies and financial policies, we cap their ratings by those on Telefonica under our parent-subsidiary links criteria. Telefonica Chile and Telefonica Moviles Chile are the largest fixed- and mobile- telephony providers, respectively, in the country. The fixed segment represented about 42% of consolidated revenues and 43% of EBITDA during the 12 months ended June 30, 2012. (For the analytical purpose of this rationale, consolidated means aggregated figures of the two entities.) We expect the fixed-line business to remain vulnerable to intense competition and a declining trend in traditional services. The mitigating factors are the Telefonica Chile's offering of bundled services, some additional gains in broadband internet through increased penetration in the middle- and low-income population segments and the marketing of products with higher speeds, and the digital TV business segment. We expect on a consolidated basis a low single-digit drop in revenues in 2012, as a result of a lower volume of fixed-line services and the comparison with 2011 during which the company registered an extraordinary sale of cell towers, despite increases in other services. However, we expect a single-digit revenue growth in 2013 due to continued growth in fixed broadband, digital TV, and data transmission segments. In the mobile business, we expect competitive pressures to be offset by an improvement in product mix with a higher participation of mobile broadband due to higher demand for data. Telefonica Moviles Chile was awarded 4G spectrum of 40 Mghz, which will facilitate the deployment of LTE in the near future, permitting higher data transmission speeds. In 2014, revenues will weaken due to the expected 50%-80% drop in mobile termination rates. Standard & Poor's expects consolidated EBITDA margins to remain at about 37%. Margins have decreased as a result of higher expenses to facilitate the implementation of number portability and increased competition. Annual consolidated EBITDA should be in the CLP600 billion - CLP650 billion for the next two years: CLP200 billion - CLP260 billion in the fixed segment and CLP350 billion - CLP400 billion in the mobile business. Cash generation should remain sound in the next three years despite the consolidated company's relatively high capital expenditures and expected high dividend distributions. Nevertheless, the consolidated company has a flexible dividend policy, relatively low maintenance capex levels, and enjoys a manageable debt maturity schedule and good access to credit markets. During the 12 months ended June 30, 2012, the consolidated company posted consolidated funds from operations (FFO) to consolidated debt of 74.6%, consolidated debt to consolidated EBITDA of 1.2x, and consolidated EBITDA interest coverage of 15.5x. In the fixed segment, FFO to debt was 62.6%, debt to EBITDA of 1.5x, and EBITDA interest coverage of 15.1x. We expect a slight deterioration in consolidated credit metrics due to Telefonica Chile's new debt issuance which will be on the balance sheet until 2013 and 2014 debt maturities approach. However, its credit metrics would remain in line with a modest financial profile, with debt to EBITDA of 1.5x, FFO to debt of 61.4%, and EBITDA interest coverage of 12.9x in 2012 and 1.3x, 66.7%, and 12.5x, respectively, in 2013. Liquidity We consider the consolidated company has "adequate" liquidity, under our criteria. We expect that sources of liquidity will exceed uses by at least 1.5x for the next two years, sources to continue to exceeding uses even if EBITDA declines by 20%. We expect on a consolidated basis sources of liquidity will include cash of CLP142 billion, as of June 30, 2012, FFO of more than CLP500 billion in the next 12 months, and approximately CLP200-250 billion from the recent debt issuance. Cash uses during the next 12 months will likely include working capital and capital investments of about CLP400-450 billion that will be mainly used to increase the consolidated company's network capacity and deploy fiber and LTE, debt maturities of about CLP130 billion, and expected dividend payments in the range of CLP200 billion - CLP300 billion. We believe the company's financial flexibility will allow it to lower its capital expenditures and dividend payments under a stress scenario. Our liquidity analysis incorporates qualitative factors, including our view that the consolidated company has sound banking relationships, access to local and international capital markets and overall prudent financial risk management. The consolidated company is in compliance with the financial covenants under its term loan as of June 30, 2012. We expect that the consolidated company will maintain an ample cushion under its covenants in 2012. Outlook The outlook is negative. The outlook mirrors the negative outlook on Telefonica S.A., given the considerable control it exercises over Telefonica Chile's business strategy and financial policy. We could lower the ratings if the consolidated company's financial policy becomes more aggressive, causing debt to increase and coverage metrics to deteriorate to a consolidated adjusted gross debt to EBITDA in excess of 2.0x, or if we downgrade the parent. A revision of the outlook to stable would depend upon a similar revision of the outlook on its parent company, coupled with Telefonica Chile's ability to maintain stable financial indicators in the next 12 months. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Business And Financial Risks In The Global Telecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List New Rating Telefonica Chile S.A. Senior Unsecured BBB Ratings Affirmed Telefonica Chile S.A. Corporate Credit Rating BBB/Negative/-- (Caryn Trokie, New York Ratings Unit)