(The following statement was released by the rating agency)
-- 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.
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
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.
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
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.
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
Telefonica Chile S.A.
Senior Unsecured BBB
Telefonica Chile S.A.
Corporate Credit Rating BBB/Negative/--
(Caryn Trokie, New York Ratings Unit)