Fitch Ratings has downgraded all of
The rating action applies to the Long Term (LT) Foreign Currency (FC) Issuer Default Rating (IDR), the LT Local Currency (LC) IDR, and the PEN1.7 billion notes due 2027. The Outlook on the IDRs remains Negative.
The downgrade of TdP's ratings reflect a deterioration in the company's financial profile, resulting from an intense competitive environment and cost inflation pressures. While TdP benefits from its scale as the largest operator in
Improvement in the company's cash flow is dependent on successful cost reduction efforts, as revenue is not expected to recover to pre-pandemic levels in the near term. Increasing profitability along with an improvement in subscriber trends and clarity regarding tax liabilities could result in a stabilization of the ratings.
Key Rating Drivers
Tax Liability Uncertainty: As of
Weak Profitability, Negative FCF Trends: Fitch expects FCF to gradually improve over the rating horizon, but will remain negative and continue to weigh on the company's financial profile. Despite experiencing a partial recovery in mobile revenues off of pandemic lows, EBITDA margins continued to deteriorate in 2021 as cost inflation pressures have mounted. The company experienced flat yoy growth in revenues in its fixed segment in 2021, driven by slow rollout of its fiber network and intense competition.
Fitch expects an acceleration of fiber rollout and low single digit ARPU growth to offset declining demand for fixed voice, generating revenue growth in the low single digits for the fixed business over the rating horizon. A more stable mobile competitive environment, growing demand for broadband, and cost containment efforts should result in modest EBITDA margin expansion over the rating horizon, albeit below historic levels and below that of investment-grade peers.
Leverage Expected to Remain Elevated: EBITDA compression resulted in net debt/EBITDA of 3.1x in 2021. Fitch forecasts capital intensity of roughly 10% while margins will likely only improve marginally as competition spurs network investments, limiting FCF improvement. As a result, Fitch expects the company's net leverage to remain near 3.0x in the medium term as gradually improving EBITDA is offset by capex needs.
Positively, proceeds from asset sales could mitigate the need for debt financing in the near term. Fitch forecasts net and gross leverage of around 3.0x and 3.2x, respectively, commensurate with a 'BB+' rating. A steadily improving Peruvian economy should help drive better operating performance, which will be offset by the high level of competition in mobile and fixed.
Strong Market Shares and Diversification: TdP's business profile, particularly in terms of market share and diversification, remains solid. TdP is well-diversified between fixed and mobile service offerings despite market share losses in recent years due to intense competition, most notably on the mobile side as Entel and Bitel (
Fitch estimates TdP has a mobile subscriber share of approximately 30% and a fixed-line subscriber share of over 60%. The company plans to focus on expanding and improving its fixed services over the medium term, mainly through the acceleration of fiber deployment. Fitch expects marginal improvement in ARPUs on price increases as consumer spending improves and the product portfolio shifts to higher value services.
Uncertain Prospects for Strategy: TDP has so far been largely unable to execute its growth strategy to offer quad-play services through its
Linkages with
Derivation Summary
In comparison to other regional peers in the 'BBB' rating category, TDP's business position is toward the lower end of the category given its still-leading, but weakening market positions in the highly competitive Peruvian telecom industry. The company's financial profile has deteriorated since 2016 due to intense competition. This has caused a decline in operating margins and cash flow generation, which are more in line with 'BB' category issuers. Total debt/EBITDA at the company, above 3.5x, is at the upper end of investment grade.
TdP's business position is roughly in line with sister company
TdP is rated one notch below competitor
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Mobile revenues growing from PEN3.5 billion to PEN3.9 billion over the rating horizon;
Low single-digit growth in mobile subscribers, with modest ARPU growth and handset sales resuming their pre-pandemic trend as consumer spending improves;
Fixed revenues growing from PEN3.6 billion to PEN3.8 billion over the rating horizon;
Continued double digit declines in fixed-line voice subscribers, partially offset by broadband and pay-tv subscribers growing in the low single digits, with fixed ARPUs growing in the low single digit percentage range;
EBITDA margins gradually improving to around 13.5% with an improved pricing environment offset by mix-shift and cost inflation;
Capital intensity in the low double-digits percentage range;
Fitch does not factor in a payment of the tax liability in the base case, due to uncertainties.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Stabilization of the ratings is dependent on attaining greater clarity on manageability of tax liability payments and the company achieving stability in market position and margin expansion materially above forecasts.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Continued deterioration of margins and competitive position regardless of credit metrics;
Total debt/EBITDA sustained above 3.5x or net debt/EBITDA above 3.0x;
Materialization of large debt-funded tax liability payments could result in a multiple notch downgrade.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity Supports Flexibility: As of
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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