Fitch Ratings has taken the following rating actions on Telecom Argentina (TEC2.BA) S.A. (TEO):
–Local currency Issuer Default Rating (IDR) upgraded to ‘BB-‘ from ‘B+’;
–Foreign currency (FC) IDR affirmed at ‘B’;
–National scale ratings upgraded to ‘AA+(arg)’ from ‘AA(arg)’;
–National equity rating affirmed at ‘1’.
The Rating Outlook is Stable.
TEO’s rating upgrades and Stable Outlook reflects the company’s continued
strong
operating performance driven by the mobile segment, expectation of low leverage
and the end of judicial actions between shareholders, which eliminate any
uncertainty related to this. The FC IDR is constrained by Argentina’s country
ceiling of ‘B’. TEO maintains a solid market position as a consequence of its
diversified services portfolio with multiple platforms resulting in strong cash
flow generation and a conservative financial profile. The ratings are tempered
by strong competition, regulatory risk in the fixed-line business, and
inflation
pressures over its cost structure.
The ratings take into account the relationship between controlling shareholders
Telecom Italia and the Werthein Group, and the agreement they reached last year
to end all judicial actions between the parties. As of June 30, 2011, Telecom
Italia owns 68% of Sofora (ultimate controlling entity of TEO), while the
Werthein Group owns 32%. The ratings also incorporate ANSES (nationalized
pension funds) ownership in TEO, which owns approximately 24.98%, should not
change TEO’s main strategy.
Fitch believes fixed-mobile convergence can help integrated operators such as
TEO, to improve customer loyalty, reduce operating costs and avoid
cannibalization between business segments. In addition, as fixed and mobile
data
demand grows in the future, the company’s integrated platforms should enable it
to optimize costs and network investments. TEO benefits from a diversified
business mix with operations consisting of fixed and mobile services. The
mobile
business unit is the main driver of the company’s operating performance,
accounting for 70% of revenues and 79.7% of EBITDA during the six months ended
June 30, 2011. TEO’s incumbent position in northern Argentina in fixed-line
services and mobile services mitigates potential fixed-line traffic loss due to
mobile substitution.
TEO’s financial profile is expected to remain strong. The company has paid down
most of its debt, primarily with improved operating results and the use of free
cash flow for debt reduction. In 2010 TEO achieved a solid performance, strong
operating results and low leverage. Consolidated revenues grew 20% when
compared
with the previous year, driven by the mobile segment. TEO’s consolidated
revenues during the six month period ending June 30, 2011 ascended to ARS 8,616
million representing an increase of 28% growth when compared with the same
period of the previous year. EBITDA totalled ARS 2,702 million maintaining a
stable margin of 31%. Fitch expects that TEO growth will slow as the market
matures.
The company is focusing its efforts in offering of a full range of integrated
fixed and wireless services. The company’s mobile strategy is oriented towards
improving the mix of postpaid users by promoting 3G services, better customer
service and high-end handsets. Mobile data services have room for growth
despite
VAS accounting for 46% of service revenue, as most of the revenue from VAS
relates to text messaging. The strategy on the fixed business continues to
center on bundle offering that includes voice and broadband services and to a
lesser extent pay-television services, including newly offered video streaming
services. The company has a commercial agreement with DirectTV to offer pay
television services through a bundle offering.
Fitch views the upcoming spectrum auction to be manageable for TEO, given its
cash balances and strong pre-dividend free cash flow generation. Capex to
revenues ratio can increase to up to 25% in 2011 from traditional levels of
close to 15% if the auction is concluded before year end. TEO’s financial risk
profile is not expected to materially change as a result of the above events.
TEO’s liquidity position is strong. As of June 30, 2011 cash balances amounted
to approximately ARS 1.4 billion, more than 7 times (x) total indebtedness and
free cash flow for the 12 months ended in the same period was ARS 1.8 billion.
Total debt was ARS 189 million, composed of ARS3 million allocated in Personal
and ARS186 million in Nucleo. Credit metrics are expected to continue to be
robust. As of June 30, 2011, the company’s total debt-to-EBITDA ratio was 0x
and
its EBITDA-to-interest ratio was 74.9x.
Contact:
Primary Analyst
Maria Jose Lobasso
Associate Director
+54-11-45235-8138
Fitch Ratings Argentina S.A.
Sarmiento 663 7th floor
Buenos Aires, Argentina
Secondary Analyst
Sergio Rodriguez, CFA
Senior Director
+52-81-8399-9100
Committee Chairperson
Cecilia Minguillon
Senior Director
+54-11-5235-8123
(New York Ratings team)
(email: Harold.Barnett@thomsonreuters.com;
Reuters messaging: harold.barnett.thomsonreuters.net; Tel: +1-646-223-4186))
Source: reuters.com