Fitch Ratings has affirmed Liberty Communications of Puerto Rico LLC's (LCPR) revolving credit facility (RCF), LCPR Loan Financing LLC's 2028 Term Loan, and LCPR Senior Secured Financing Designated Activity Company's 2027 and 2029 senior secured notes at 'BB+' and revised the recovery rating to 'RR2'from 'RR1'.

Fitch has also affirmed LCPR's Long-Term Issuer Default Rating (IDR) at 'BB-'. The Rating Outlook has been revised to Negative from Stable.

The Negative Outlook reflects Fitch's expectation that net leverage could remain elevated given high competition in Puerto Rico's mobile market and limited growth prospects of the island's fixed market, which could result in stagnant to declining average revenue per user (ARPU). Absent some combination of sound EBITDA recovery and debt reduction, a ratings downgrade could occur.

Key Rating Drivers

Elevated Leverage: LCPRH's EBITDA weakened in 2022 due to cost pressures, integration expensesand lower ARPU. Some of this was due to the effects of Hurricane Fiona passing through Puerto Rico in September of 2022. Although hurricane effects should fade overtime, there is uncertainty on the extent of EBITDA recovery due to the highly competitive wireless market and the limited growth prospects of the fixed market, which could lead to more competition and declining to stagnant ARPUs overtime.

Fitch estimates a modest decline in net leverage to 5.3x in 2023 from about 5.5x projected in 2022 and 4.9x in 2021. Absent a more robust EBITDA recovery and debt reduction, leverage will likely remain elevated and above 5x.

Mixed Operating Environment Trends: LCPRH benefits from a U.S. dollarized economy with relatively high GDP per capita within the region and favorable systemic governance characteristics. High per-capita GDP supports Puerto Rico's mobile base, which is comprised mainly of 4G post-paid customers and compares favorably with other markets in Latin America and the Caribbean. GDP and population trends are projected to remain broadly flat and may even contract over the next few years, comparing unfavorably to most markets in Latin America.

Strong Market Position: LCPRH is a large telecom operator with strong market shares in wireless at number two, broadband at number one and Pay-TV at number one in Puerto Rico. Wireless represented 49% of LCPRH's consolidated 2022 revenue, and Fitch estimates broadband was close to 20% and Pay-TV was around 10%%. The remaining 21% was mainly generated by providing broadband internet, video, fixed-line telephony, mobile and managed services to enterprises. T-Mobile US, Inc. (BBB-/Positive) has a number one mobile market share on the island but does not have a significant broadband or fixed-line presence.

America Movil S.A.B. de C.V.'s (A-/Positive) Claro unit is number two in broadband and number three in mobile, although LCPRH's mobile subscriber base is weighted toward post-paid. America Movil is more heavily weighted toward pre-paid customers, which typically generate lower average revenue than post-paid users.

LLA Linkages: Liberty Latin America (LLA)'s financial management involves moderately high amounts of leverage across its legally separate credit pools. LCPR represents approximately 30% of LLA's consolidated EBITDA and 35% of consolidated net debt, while Cable & Wireless Communications Limited (C&W; BB-/Stable), which operates in much of the rest of the Caribbean and in Panama, generates about 60% of EBITDA and holds around 55% of net debt.

A deterioration of the financial profile of one of the credit pools, or the group more broadly, could place more financial burdens on LCPRH, given LLA's acquisitive nature and its willingness to move cash around for M&A. LCPR's cash declined to USD72 million in 2022 from USD159 million in 2021 mainly due to shareholder distributions.

Secured Instrument Recovery Prospects: The instrument ratings reflect Fitch's approach to Recovery Ratings under its Corporate Recovery Ratings and Instrument Ratings Criteria. Secured debt ratings of 'BB+' incorporate collateral support included in the transaction structure. The instruments qualify as 'Category 2 First-Lien' with an'RR2' and a two-notch uplift from LCPR's IDR.

LCPR has an ESG Relevance Score of '4' for Exposure to Environmental Impacts to due to its operations in a hurricane-prone region, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

LCPR has an ESG Relevance Score of '4' for Financial Transparency as LLA's financial disclosures and financial management strategy are somewhat opaque, relative to peers in the region, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

Derivation Summary

LCPRH is smaller and with less geographic diversification compared with CWC while it operates in a much safer jurisdiction. LCPR's ratings have a Negative Outlook as its net leverage could remain above 5x given increased competition and various cost pressures, compared with expectations of C&W's net leverage below 4.5x.

Compared to WOM S.A. (B+/Negative), LCPRH has a more mature growth profile, greater service diversification and scale and a history of positive pre-distribution FCF generation. LCPRH also has a much larger post-paid subscriber base, which tends to be more stable and profitable, at around 80% compared with WOM in the 50% range. WOM's ratings have a Negative Outlook due to projected negative FCF and the expectation that net leverage could remain above 5x. The shareholders of both companies have taken actions that have resulted in increased net debt although the degree of leveraging at WOM has been more meaningful.

Compared with Caribbean peer Digicel International Finance Limited , LCPRH has a more subscription-based diversified product portfolio and a less leveraged capital structure. Consolidated parent-level leverage is much lower at LLA than at Digicel Group Holdings Limited . LLA has a business profile similar to Millicom International Cellular S.A. (MIC; BB+/Stable), a holding company with subsidiaries inleading positions in several markets.

LLA's revenue base has more U.S. dollars and subscription revenue, while Millicom's revenue is primarily local currency denominated. Both have seen leverage increase from acquisitions; however, LLA's leverage is higher than Millicom, which Fitch expects to decline to 2.5x-3.0x. LCPRH's business profile and diversified service offerings in Puerto Rico are similar to those of Millicom's Telecomunicaciones Digitales, S.A. (BBB-/Stable) in Panama (BBB-/Stable). Telecomunicaciones Digitales, S.A. benefits from lower leverage, supporting the multi-notch difference in ratings.

Key Assumptions

Fitch's Key Assumptions Within The Rating Case for the Issuer Include:

Fixed revenue generating units (RGUs) grow about 2% overall in 2023 and slowdown in 2024, mainly due to broadband penetration offset declining Pay-Tv and telephone over the medium term;

Blended fixed ARPU declines about 1% in 2023 and increases marginally in 2024;

Flat to marginally positive mobile RGUs, with ARPUs declining in 2023 on continued promotional activity and flat to marginally positive in 2024;

Blended EBITDA margins of around 32% in the medium term, equivalent to around USD500 million;

Capex of around USD200 million to USD250 million, or approximately 14%-16% of revenue.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Fitch does not anticipate an upgrade in the near term, given the company's and the larger group's elevated leverage profiles;

Longer-term positive actions are possible if total debt/EBITDA and net debt/EBITDA are sustained below 4.50x and 4.25x, respectively, at LCPR and LLA.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A meaningful contraction of mobile or fixed market share or increased competition that leads to lower cash flow generation;

Total debt/EBITDA and net debt/EBITDA at LCPR sustained above 5.25x and 5.00x, respectively, due to organic cash flow deterioration or M&A;

While the three credit pools are legally separate, net debt/EBITDA at LLA sustained above 5.0x could result in negative rating actions for one or more entities in the group.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: The company does not face any large debt maturities until 2027 when USD1.2 billion of notes are due. Liquidity is mainly supported by expectations of pre-distribution FCF of USD20million to USD50 million per year and access to a USD173 million revolving credit facility maturing in 2027. Readily available cash and equivalents of USD72 million as of YE 2022.

Fitch expects LLA will manage LCPRH similarly to its other subsidiaries, with excess cash used for shareholder distributions and M&A. Although credit pools are legally separate, LLA has a history of moving cash around the group for investments and acquisitions. This approach allows subsidiaries to pursue growth opportunities, however, it limits subsidiary prospects for material deleveraging. LLA's 2022 consolidated leverage was 4.4x on a net basis and 4.9x on a gross basis based on operating EBITDA of USD1.6 billion, USD7.9 billion in debt and USD800 million of cash.

Issuer Profile

Liberty Cablevision of Puerto Rico (LCPR) is a telecommunications operator that offers mobile, Pay-TV, broadband and fixed telephony services to residential customers, as well as medium and large businesses in Puerto Rico and the US Virgin Islands.

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

LCPR has an ESG Relevance Score of '4' for Exposure to Environmental Impacts to due to its operations in a hurricane-prone region, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

LCPR has an ESG Relevance Score of '4' for Financial Transparency as LLA's financial disclosures and financial management strategy are somewhat opaque, relative to peers in the region, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

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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