TEXT-Fitch affirms the Philippines' Globe at 'BBB-'; outlook stable

Fri Nov 23, 2012 2:45am EST

(The following statement was released by the rating agency)

Nov 23 - Fitch Ratings has affirmed the Philippines-based Globe Telecom, Inc.'s (Globe) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlook is Stable. A full rating breakdown is provided below.

The ratings reflect Globe's stable credit metrics as the number-two telecom operator in the Philippines with over 30% market shares in wireless and broadband. The Stable Outlook reflects Fitch's view that the company's financial metrics, despite on-going margin deterioration, will remain commensurate with its current rating level over the next 12 to 18 months.

Fitch expects the company's operating margin to continue to decline over the medium term due to growing competition on unlimited tariff offerings and handset subsidies. Fitch believes that this trend is unlikely to reverse in a maturing wireless industry with an over 100% penetration rate. This also means subscriber acquisition cost will increase as operators seek to protect market share.

In addition, Fitch believes that regulatory risk is increasing as the domestic regulatory body, National Telecommunications Commission (NTC), becomes more consumer-oriented. NTC recommended that Philippine telecom operators lower standard text message fees by 20% and reimburse any over-charged amounts to subscribers. Operators have indicated that they would appeal on a legal basis.

However, Fitch does not believe the potential revenue cut will materially impair Globe's credit profile. This is because revenue generated from standard text service, subject to the regulation, is significantly lower as a share of total revenue than that from unregulated bucket-pricing tariffs. Fitch also expects Globe's operating EBITDAR margin, despite deterioration, to remain high at over 40% compared with other investment-grade Asia-Pacific telecom operators.

Fitch forecasts that the company's free cash flow (FCF) generation will turn negative in 2012 given high capex and dividends. In addition, the company's tender offer to acquire Bayan Telecom's debt could amount to USD134m which could increase funds flow from operations (FFO)-adjusted net leverage to 2.3x by end-2012 from 1.9x at end-2011. However, Fitch expects leverage to gradually improve towards 2x over the medium- to long-term as capex requirements decline.

What Could Trigger A Rating Action?

Negative: Future developments that may, individually or collectively, lead to negative rating action include

-sharp deterioration in the operating profile; debt-funded acquisitions or capital management initiatives, which result in FFO-adjusted net leverage exceeding 2.5x

Positive: Future developments that may, individually or collectively, lead to positive rating action include

- FFO-adjusted net leverage falling below 1.0x on a sustained basis, which would lead to Local-Currency IDR being upgraded

- an upgrade of the Philippines' Country Ceiling ('BBB-'), which would lead to the Foreign Currency IDR being upgraded. Globe's Foreign Currency IDR is capped is capped by the former.

A list of rating actions

- Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Outlook Stable

- Long-Term Local-Currency IDR affirmed at 'BBB-; Outlook Stable

- National Long-Term rating affirmed at 'AAA(phl)'; Outlook Stable

- Foreign senior unsecured rating affirmed at 'BBB-'

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