Fitch Downgrades ETB to 'BB+'; Outlook Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Empresa de Telecomunicaciones de Bogota S.A. E.S.P.'s (ETB) ratings as follows:

--Long-term foreign and local currency Issuer Default Ratings (IDRs) to BB+ from 'BBB-';

--COP530 billion senior notes due 2023 to BB+ from 'BBB-';

--National long-term rating to AA+(col) from 'AAA(col)'.

The Rating Outlook is revised to Negative from Stable.

KEY RATING DRIVERS

The downgrade reflects ETB's continued struggle to curb its ongoing EBITDA erosion, which fell by 35.5% in 2015 compared to a year ago, due to intense price-based competition, falling average revenue per user (ARPU), and weak demand for its main fixed-voice service. The company has generated negative FCF since 2013 which led to a steep increase in its leverage ratio, which is no longer deemed in line with its previous investment grade category rating.

The Negative Outlook also reflects Fitch's view that a tough operational environment could hinder any meaningful turnaround in ETB's cash flow generation. A lack of indication for resumed EBITDA growth and positive FCF generation in the short to medium term will result in a further ratings downgrade.

Increasing Leverage

Fitch expects continued increase in ETB's leverage ratio due to a persistent negative FCF generation despite reduced capex. Given tough competitive landscape, Fitch does not foresee any material improvement in the company's EBITDA generation, which is expected to be around COP323,790 million - 341,859 million in 2016 and 2017. As such, the company's net leverage, measured by total adjusted net debt to EBITDAR, is forecast to increase to 3.5x by end-2017, which unfavourably compares to just 0.3x at end-2014 and 2.8x at end-2015, respectively.

ETB expects to increase its operational revenues by 16.8% in 2016 and achieve an average growth rate of 14.3% in 2016-2020. Given the recent track record and operational challenges, Fitch remains cautious that the goal would not be achievable. Fitch's base case projection indicates an average revenue growth of mid-single-digits during this period, which is substantially lower than the company's target.

Negative FCF

ETB plans to cut its capex budget during 2016-2019 to USD700 million from the original USD1.2 billion in order to optimize its cash flow usage. Instead of continued network coverage expansion for fiber-to-the-home (FTTH), the company plans to focus on boosting the proportion of connected homes on the network, which was just 9% of its total homes passed at end-2015, to increase revenues. ETB will continue its effort to expand its fiber-to-the-cabinet (FTTC) coverage to secure future revenue growth sources. Negatively, the trimmed capex amount would still not be covered by the projected EBITDA generation during the period.

In addition, ETB's strategy to grow its 4G mobile service should result in increasing network rental expenses, estimated to be about 8% of its revenues in the short to medium term, which Fitch reflects as off-balance sheet debt. Including this, the company's total adjusted debt is expected to increase to above COP1,834 billion by end-2017 from COP 1,390 billion at end-2015.

Pressured ARPU and Margin

ARPU and profitability deterioration is unlikely to reverse over the medium term as competition remains centered on price. ETB would need to implement aggressive tariff policies to rapidly boost penetration of its fixed-line bundled services, including pay-TV on the FTTH networks. While the competitive landscape in the fixed-line segment in Bogota remains intense, the company is also entering the already mature mobile market that is dominated by well-established national operators. Should ETB pursue aggressive marketing policies to improve its market share, coupled with falling ARPU, a downward pressure on profitability and operational cash flow generation would continue over the medium term. The company's EBITDA margin slid to 21.5% in 2015 from 34.5% in 2014 amid slow revenue growth.

ETB's core service sales grew by just 1.8% in 2015 mainly due to the continued contraction its local fixed-voice and long distance revenues, which fell by 7% and 14%, respectively, during the period. These service segments represented 41% of its total revenues in 2015. Fitch expects continued revenue erosion from these main services. Positively, this revenue loss will continue to be modestly offset by steady growth in internet, pay-TV, and mobile revenues.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for ETB include:

--Revenues growth at a 4.3% average in 2016 - 2020

--Slow network penetration and price competition pressuring ARPU, resulting in EBITDA margins below historic levels at 21% - 22% in 2016 and 2017

--Operating lease expenses estimated to be 8% of revenues

--Capex to sales ratio to fall to 30% by end-2017

--Dividends payments of COP58 billion and COP 83 billion in 2016 and 2017, respectively

--Recovery of account receivables from Claro is not included.

RATING SENSITIVITIES

A negative rating action would be considered if ETB fails to show any signs of improving FCF generation in the short to medium term. In addition, the ratings will be pressured if the company's ongoing EBITDA erosion continues, resulting in its net leverage sustained over 3.5x over the medium term.

A positive rating action is unlikely at the current juncture given the company's weakened financial profile compared to its solid historical level and an unfavourable operational outlook.

LIQUIDITY

ETB's liquidity profile weakened during 2015 following increased CAPEX and dividend payments amid EBITDA deterioration which depleted its readily-available-cash balance by over COP 500 billion. Cash balances at the end of 2015 stood at COP 574 billion, a substantial decline from COP 1.0 trillion a year ago. Given Fitch's expectation for continued negative FCF generation going forward, it is highly unlikely that the company can restore its liquidity profile to a level that is in line with its strong historical level in the short to medium term.

Positively, ETB does not face any material debt maturity until 2023 when its COP530 billion notes become due.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000413

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000413

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160303006453/en/

Fitch Ratings
Primary Analyst
Alvin Lim, CFA
Director
+1-312-368-3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julio Ugueto
Associate Director
+571-484-6770 Ext. 1038
or
Committee Chairperson
Daniel R. Kastholm, CFA
Regional Group Head - Latin America Corporates
+1 312-368-2070
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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