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.
TdP benefits from its scale as the largest operator in
An improvement in subscriber trends and cash flow generation could result in a stabilization of the ratings. Otherwise, Fitch will likely downgrade the TdP.
KEY RATING DRIVERS
Negative Revenue, Profitability Trends: From FY2016 through FY2020, TdP's revenues have fallen from PEN9.4 billion to PEN6.6 billion and EBITDA margins have fallen from 30% to 12%. The mobile segment has been hit especially hard by vigorous price competition. The mobile segment has lower ARPUs and fared worse than its competitors in 2020. After a 19% fall in mobile revenues, led by the 43% collapse in handset sales, the company stands to benefit from an improving economy.
The company also experienced revenue declines in the fixed consumer and B2B segment in 2020, which Fitch expects to improve to mid-single-digit growth in 2021, as the company focuses on accelerating its fiber rollout. A resumption of growth in 2021, along with operating expense and personnel cost discipline, should push EBITDA margins above 15%.
Leverage Expected to Increase: TdP's declining revenues and EBITDA compression caused Net Debt/EBITDA to increase to 2.8x as of YE2020. Fitch forecasts capital intensity of 12%-14% as competition spurs network investments, driving FCF generation lower. As a result, Fitch expects the company's leverage to rise in the medium term as the company increases debt and EBITDA margins in the 15%-16% range. Positively, proceeds from asset sales should mitigate the need for debt financing in the near term. Fitch forecasts net and gross leverage of around 3.0x and 3.5x over the rating horizon.
A rebound in the Peruvian economy should help drive an improvement in operating performance, which will be offset by the high level of competition in mobile and fixed. Increased capital expenditures, or a near-term payment of the tax liability in 2021 or 2022 would add pressure to the capital structure.
Strong Market Shares and Diversification: TdP's business profile, particularly in market share and diversification, remains consistent with investment grade. 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 (
The company plans to focus on expanding and improving its fixed services in 2021, mainly through the acceleration of fiber deployment. TdP currently offers fiber to approximately 10% of clients and aims to reach 30% by YE2021 through differentiation of Pay TV content and capacity advantages. Fitch expects marginal improvement in APRUs on price increases as consumer spending rebounds and the product portfolio shifts to higher value services.
Peruvian Operating Environment:
Adequate Liquidity Supports Flexibility: Fitch expects
Uncertain Prospects for Strategy: TDP has so far been unable to execute its growth strategy to offer quad-play services through the
Tax Liability Forgiveness, Uncertainty: In
Linkages with
DERIVATION SUMMARY
TDP's business position compares well with regional peers in the 'BBB' rating category relative given its still-leading market positions in the 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
KEY ASSUMPTIONS
Mobile revenues growing from PEN3.0 billion to PEN3.6 billion over the rating horizon;
Flat overall mobile subscribers, with modest ARPU growth and handset sales resuming their pre-pandemic trend as consumer spending rebounds;
Fixed revenues growing from PEN3.5 billion to PEN4.1 billion over the rating horizon;
Continued double digit declines in fixed-line telephony subscribers, partially offset by broadband and pay-tv subscribers growing in the low single digits, causing fixed ARPUs to increase by ;
EBITDA margins of approximately 15%-16%, due to headcount, cost control on other operating expenses;
Capex of around PEN800-900 million in 2021, 12-14% of revenues thereafter;
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:
An upgrade of the ratings is unlikely, given the company's subscriber trends and the competitive environment in
Stabilization of the ratings is dependent on the company resuming revenue and subscriber growth, and improving EBITDA margins;
Expectation of Total Debt to EBITDA around 2.5x and Net Debt to EBITDA of around 2.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Total Debt / EBITDA sustained above 3.0x or Net Debt / EBITDA above 2.5x;
Large debt-funded tax liability payments.
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: Fitch expects
The company's debt consists of primarily of long-term bonds (PEN3.09 billion), with a minor portion of short-term bank loans (PEN8 million). The company's debt is completely payable in PEN, limiting FX risk for the company.
SUMMARY OF FINANCIAL ADJUSTMENTS
Operating lease adjustments made.
Operating income adjusted for nonrecurring items like restructuring and asset sales.
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
RATING ACTIONSENTITY/DEBT RATING PRIOR
Telefonica del Peru, S.A.A . LT IDR BBB- Downgrade BBB
LC LT IDR BBB- Downgrade BBB
senior unsecured
LT BBB- Downgrade BBB
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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