Fitch Rates Millicom's USD500M Proposed Notes 'BB+(EXP)'

Fri May 10, 2013 12:14pm EDT

(The following statement was released by the rating agency) MONTERREY, May 10 (Fitch) Fitch Ratings has assigned Millicom international Cellular, S.A.'s (MIC) proposed USD500m senior unsecured notes due 2020 a 'BB+(EXP)' rating. Proceeds from the notes will be used primarily to refinance existing debt at the African subsidiaries and to a lesser extent for general corporate uses. KEY RATINGS DRIVERS: MIC's ratings reflect the company's geographically diversified portfolio, leading market positions in most of its markets, value added services orientation, expectation of moderate leverage, solid liquidity and pre-dividend free cash flow (FCF) generation. The ratings are tempered by exposure to markets with low sovereign ratings and low GDP per capita, pricing pressures, debt allocation between subsidiaries and the holding company, shareholder returns policy and recent M&A activity. MIC's rating reflects its leading positions in the majority of its markets, resulting in FCF generation. Strong brand recognition and extensive distribution networks helps the company mitigate a strong competitive environment, particularly in mobile voice. The company's focus in growing data revenues as part of its strategy of evolving to a digital company from a communications company is aimed to alleviate pressures from voice revenues. The ratings incorporate the company's exposure of its operation to countries with low sovereign ratings which tends to be more politically unstable and more volatile in terms of economic growth. This adds currency risk, as part of its debt is denominated in USD and cash flow is generated in local currencies. For the 12 months ended March 31, 2013 approximately 84% of EBITDA and the majority of operating FCF was generated by the Central and South American operations. The African operations, with the exception of Tanzania, are not expected to generate significant cash flow over the next few years. The company's strategy involves developing VAS services as traditional mobile services mature. During 2012 Millicom restructured its business segments in each country by product categories to focus on new revenue sources, which include data and mobile financial services among others. In addition the company acquired CATV provider Cablevision in Paraguay, entered into an agreement to acquire an initial 20% stake in Rocket Internet, which has operations in Latin America and Africa and entered into discussions with UNE in Colombia to merge both companies' assets. Recent M&A activity follows MIC's approach to complementing its existing service portfolio; however it should result in higher leverage levels. Net debt to EBITDA should approximate to 1.5x after the transaction with UNE is completed, in line with Fitch's expectations. Fitch believes that a successful merger will improve the competitive position of the resulting entity in Colombia, as they offer complementary services. Fitch also believes there is some room to achieve synergies that could result in lower leverage levels over the medium term. Fitch remains concerned that the investment in Rocket could require additional capital injections, which could cause Millicom's leverage to increase. MIC does not expect Rocket to become EBITDA neutral until 2015, with EBITDA for 2013 being negative in the range of USD125m-USD200m. The exercise of the option to increase the ownership in Rocket's Latin America Internet Holdings (LIH) and Africa Internet Holdings (AIH) to 35% from 20% for a combined EUR85m (USD109m) is expected to be paid with cash by September of 2013. MIC has an option to increase its stake in Rocket to 50% by September of 2014 by an additional EUR170m and also has an option to acquire the remaining 50% by September of 2016 depending on the performance of the business. Pre-dividend FCF margins are expected to remains somewhat stable in the next few years. As MIC moves to lower margin businesses but less capital intensive, EBITDA margin is expected to trend towards 35% in the next few years, but should be offset by lower capital expenditures. Operating performance has come under pressure due to mobile termination cuts in several markets, the strong competitive environment in Central America, data investments in South America and currency devaluation in Africa. The ratings incorporate that MIC's net debt to EBITDA (after corporate expenses) should be close to 1.5x over the long term. For the 12 months ended March 31, 2013 net debt to EBITDA was 1.2x and funds from operations adjusted net leverage stood at 1.5x. The ratings take into account the company's shareholder distribution policy, with Fitch expecting that any excess cash flow generation will be returned to shareholders in the form of dividend payments or share buybacks. Shareholder distributions totaled USD731m during 2012. MIC has historically maintained a strong liquidity position with high cash balances. Total consolidated cash as of March 31, 2013 was USD1.1bn. Total on-balance sheet debt of USD3bn was allocated at the operating companies, with 35% being guaranteed by MIC. Fitch expects that over the medium term most of the debt will continue to be allocated at the operating companies and only a small proportion allocated at the holding company. Debt maturity profile should be manageable given the company's liquidity position, pre-dividend FCF and debt maturity profile. RATING SENSITIVITIES: -A strong management commitment towards a net debt to EBITDA of 1.0x over the long term could lead to a positive rating action. - An increase in net debt to EBITDA to 2.0x without a clear path to deleveraging due to a single or combination of M&A activity, additional funding to Rocket, increased shareholder distributions or competitive pressures could lead to a negative rating action. Fitch rates MIC as follows: - Long-term local and foreign currency Issuer Default Rating (IDR) 'BB+' The Rating Outlook is Stable. Contact: Primary Analyst Sergio Rodriguez, CFA Senior Director Fitch Mexico S.A. de C.V. +52 (81) 8399-9135 Prol. Alfonso Reyes 2612 Monterrey, Mexico Secondary Analyst Owen Fenton Associate Director +44 (0) 20 3530 1423 Tertiary Analyst Michael Dunning Managing Director +44 (0) 20 3530 1178 Committee Chairperson Daniel R. Kastholm, CFA Managing Director +1 (312) 368 2070 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available 'www.fitchratings.com'. Applicable Criteria 'Rating Telecoms Companies' dated 9 August 2012; 'Corporate Rating Methodology' dated 8 August 2012; and 'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)' dated 10 August 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research Rating Telecom Companies here Corporate Rating Methodology here Parent and Subsidiary Rating Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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