MONTERREY, Mexico--(Business Wire)--
Fitch Ratings has assigned Telefonos de Mexico, S.A.B. de C.V.'s (Telmex) US$500
million 5.5% senior notes due 2019 'A-'. Fitch currently rates Telmex's local
and foreign currency Issuer Default Ratings (IDRs) at 'A-' with a Stable Rating
Outlook. Proceeds from the offering are expected to be used for general
corporate uses.
Telmex's rating are supported by the company's leading position as a fixed line
telecommunications provider in Mexico, robust multiservice network, strong cash
flow generation and a sound financial profile. Conversely, the ratings are
tempered by increased regulatory risk, heightened competition and traffic
migration from fixed to mobile networks.
Fitch believes the company has strong free cash flow generation and enough
financial flexibility to maintain its current credit profile. Investments over
the past years has resulted in a multiservice network capable of offering
simultaneous voice and data services to most of the lines in service, reducing
future investments and underpinning growth in data and broadband services. Even
with weak operating results, cash flow can be used for debt reductions to
maintain a stable credit quality. During the past few quarters Telmex has posted
weak operating results, driven by lower revenues in local, domestic long
distance and interconnection revenues that have not been able to compensate with
lower costs, resulting in lower EBITDA generation.
Fitch expects total debt to EBITDA ratio after considering hedges to remain
stable during 2010, close to historical level of 1.5 times (x). For the 12
months ended Sept. 30, 2009, total gross debt to EBITDA was 1.8x. This ratio
does not consider derivatives gains of MXN13.4 billion associated with debt
hedges, which offsets debt increases for the past few quarters due to the MXN
devaluation. Taking into account these derivative gains, the pro forma indicator
is close to its historical average of 1.5x.
Heightened competition from CLECs, cable TV providers and mobile substitution
has resulted in revenue declines, particularly in local service and to a lesser
extent in interconnection revenues, which in turn have pressured operating
margins. Telmex's strategy has focused on offering bundled services to different
customer segments in order to gain loyalty as competition increases. In the
residential segment, the company still awaits the authorization to offer video
services and today has only a commercial agreement with Dish, where Telmex only
does the collection of bills.
Regulatory risk continues to increase for Telmex, adding to weaker financial
results. Among those regulatory issues, is the interconnection and
interoperability plan that includes unbundling of the network. While
implementation of this plan is still being defined, it may negatively affect
Telmex if it becomes effective. Network unbundling should result in increased
competition and most likely in lower network investments from Telmex.
The increase in taxes should put additional pressure to Telmex operating results
and demand for its services. Mexican authorities are passing a tax bill for 2010
that among others set a special tax for telecommunication services. This tax of
3% should be applied to all fixed (other than rural and public telephony),
mobile and pay TV services. This tax does not consider additional tax burden to
broadband services as it was originally proposed. In addition, the bill
increases value added tax to 16% from 15% and income tax to 30% from 28%
affecting the purchasing power of customers.
Other regulatory issues encompass reduction of local service areas to 197 by
2010, from the existing 397; the investigation of substantial power in certain
markets; delay in the authorization to offer pay TV services; and introduction
of number portability. According to Cofetel, Telmex has experienced 183,000 LIS
losses since number portability introduction in July 2008, which has not been
able to compensate with fixed-line additions.
Additional information is available at www.fitchratings.com.
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Fitch Ratings
Sergio Rodriguez, CFA, +011 5281-8335-7239 (Monterrey)
John Culver, CFA, +1-312-368-3216 (Chicago)
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com
Copyright Business Wire 2009
