Dec 14 - Fitch Ratings has affirmed Empresa de Telecomunicaciones de Bogota,
S.A., E.S.P. (ETB)'s foreign and local currency Issuer Default Ratings
(IDRs) at 'BBB-. The Rating Outlook is Stable.
ETB's ratings are supported by the company's sound financial profile, consistent
track record of cash from operations (CFO) generation and its leading positions
in local and broadband services in Bogota. Conversely, the ratings are tempered
by increased competition, mobile substitution, and limited geographical
footprint and service revenue diversification. The ratings take into account
ETB's plan to raise additional debt which proceeds are expected to fund its
capital expenditure plan. The ratings incorporate company's strategy focused in
strengthening its network and infrastructure in order to deliver convergent
service offerings, which will increase leverage and will result in annual
negative to neutral FCF over the next three years.
ETB's 'BBB-' foreign currency rating (FC IDR), rated at the same level of
District of Bogota(rated 'BBB-' by Fitch), has historically recognized that the
linkage between parent and subsidiary is weak and non-dependent. Although ETB is
owned by the District of Bogota (the district), the company has an independent
management and historically has maintained a conservative financial profile.
ETB's dividend payment is not material for the district's finances. Fitch
expects the relationship between the district and ETB will not affect the
company's business risk and financial profile.
ETB benefits from its position as the incumbent fixed line operator in Bogota,
which historically has resulted in FCF generation. Bogota is the most important
and competitive market in the country, which at the same time exposes it to
strong competitive pressures. ETB has an estimated 70% of lines in service in
Bogota, 43% of broad band access and an extensive network coverage, which allows
it to offer multiple services to the corporate segment located in Bogota as well
as in other major cities. However, given the importance of this market, many
competitors participate in it and have gained market share at the expense of the
Fitch expects that in the next few years' revenues from internet, data and
Pay-TV will represent about 70% of total revenues helping support EBITDA, which
is tied to the ability of the company to increase its market share in a highly
competitive environment with strong and aggressive participants. ETB's strategy
aims to strengthen its competitive position by investing over the next six years
in upgrading its network infrastructure to diversify and offset revenue decline
in the traditional local services. ETB's capex plan comprises mainly deploying
fiber to the home (FTTH), the development of a Pay-TV offering and IT services
for the corporate segment. ETB derives more than half of its operational
generation from local and long distance services, which are expected to decrease
over the medium term. Revenue growth from data and internet, including FTTH and
other related businesses, are expected to offset the decrease in traditional
revenues in the long term.
The company has managed to sustain its EBITDA generation and compensate the
decline in traditional local fixed telephony and long distance revenues through
the growth of internet and data revenues, along with the reduction of expenses.
For the 12 months ended Sept. 30, 2012, revenue was 4.1% lower than the same
period of the previous year and EBITDA margin was 45.6%, which still compares
favorably with its peers. Fitch expects EBITDA margin to decline during the next
years due to competitive pressures and changes in revenues mix, as newer
services are introduced.
Fitch expects forthcoming years' capital expenditure plan to be funded mainly
with cash flow from operations and potential additional indebtedness, which will
result in negative FCF generation. The company has some flexibility in its Capex
to the extent that approximately 30% is success based and can benefit FCF
generation. This should give the company flexibility to maintain a stable
capital structure with a manageable maturity profile. ETB has historically
generated robust cash flow, which has allowed it to fund its investments and
maintain a conservative financial profile. Over the past few years, the
company's cash flow from operations (CFFO) generation has been strong and has
covered the company's Capex and dividends, resulting in a positive free cash
flow (FCF) generation.
The rating considers that leverage should remain moderate. Fitch expects ETB's
FFO adjusted leverage and adjusted debt to EBITDAR to be close to 1.5x within
the next five years. Leverage has maintained a downward trend in recent years
and ETB's decision to fully fund its pensions and take this obligation out of
its balance sheet allows it to partially offset the expected increase in debt
without a significant deterioration in its credit profile. For the 12 months
ended Sept. 30, 2012, both FFO adjusted leverage and debt to EBITDA were 0.4
times (x). By adjusting the debt for contingencies, lease of satellite
frequencies, unfunded pension liabilities and guarantees to Colombia Movil
result in an adjusted leverage ratio of 1.3x EBIDTAR.
The company's liquidity position is strong and is supported by high cash
balances, low debt levels, a comfortable debt maturity profile and historical
positive FCF generation, which should turn neutral to negative in the next few
years as the company increases capital expenditures. As of Sept. 30, 2012 cash
balances amounted to COP539.4 billion, which positively balance against ETB's
total debt of COP277.0 billion.
What Could Trigger a Rating Action?
A positive rating action is unlikely at the moment given the increase in
leverage and expectations of negative FCF over the next few years. Future
developments that may, individually or collectively, lead to a negative rating
action include: Inability by ETB to compensate a decline in revenues and EBITDA
generation that results in a sustained increase in adjusted (for contingencies,
pension liabilities and leases) leverage over 2.0x. Likewise, additional
investments that involve debt with lower than expected operational generation
could trigger a downgrade.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'National Ratings Criteria', Jan. 19, 2011;
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 9, 2012;
--'Corporate Sector Credit Factor Guidelines - All Sectors 2012', Nov. 23, 2012.
Applicable Criteria and Related Research:
National Ratings Criteria
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Corporate Sector Credit Factor Guidelines - All Sectors 2012