Fitch Ratings has downgraded the Long-Term Local Currency and Foreign Currency Issuer Default Ratings (IDRs) of
Fitch has also downgraded VTR Finance's senior secured
The downgrades reflect the continued deterioration of VTR's fixed business and the weak operating performance of Claro Chile that have resulted in higher forecasted leverage metrics for the combined entities for 2023 than previously projected. They incorporate the limited prospects of deleveraging given intense competition in
The RWN reflects a high degree of uncertainty surrounding the financial strategy of the joint venture (JV) and its final organizational structure. The RWN and the downgrades reflect our assumption that the servicing of VTR's debt will be primarily, if not exclusively, through cash flow generated by VTR's operations and that the shareholders of VTR and Claro Chile will not inject equity into the JV to strengthen the overall capital structure and liquidity position of the JV. The RWN is expected to be resolved once the finance strategy and legal structure is determined; this could take more than six months to resolve.
Key Rating Drivers
High Leverage: Fitch expects VTR's net leverage to increase to 11x in YE 2022 before declining in the medium term based upon expectations of a slow recovery of operational performance. Fitch forecasts a Net leverage of VTR /Claro Chile combined operations at around 7.5x in 2023, which is substantially higher than Fitch previous expectations and when compared with negative sensitivities for the rating. These forecasts are based on combined net debt of around
Given the high investment needs for 5G and fiber broadband development in the midst of intense competition, the deleveraging capacity of the JV over the next two-three years will not only depend upon attaining merger synergies, but will likely require extraordinary shareholder measures.
Weak Operating Performance: VTR has not been able to halt the loss of clients and the deterioration of its EBITDA margin. The company's broadband subscribers declined to less than 1.2 million from 1.3 million since the start of the pandemic, while its ARPUs declined more than 13% due to pressure related to aggressive offers by Movistar and
Claro
Investments Pressure FCF: Fitch forecasts negative FCF generation for the combined operations of VTR/Claro Chile between 2023 and 2025. This is driven by high capex requirements of the JV in order to improve the quality of its services and network competitiveness; the focus will be related to Fiber and 5G development, as the company seeks to maintain healthy organic growth in terms of subscribers in the medium term.
Shareholder Alignment: Uncertainty around the business strategy and capital structure that the JV shareholders will pursue in the medium term is a key credit concern. The merged entity will be 50% owned by
Capturing Synergies is Key: The performance of the JV will be closely dependent on the execution of its business strategy and the ability to materialize synergies, estimated by shareholders at around
Fitch believes cost savings will be mainly related to reducing commercial costs, programming costs, personnel and roaming, among others. However, the company faces meaningful challenges to translate synergies into EBITDA margin recovery, considering the intense competition in the market, and expected ARPU pressure.
Strong Market Position and Diversification Path: The combined operations of VTR/Claro Chile will enhance the companies' market position and product diversification. In a proforma based upon information provided by Subtel as of
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, visitwww.fitchratings.com/esg.
Derivation Summary
VTR's competitive position compare favorably with other speculative-grade telecoms in the region, considering the strong company's diversification after the closing of combined operations with Claro Chile. In spite of that, the deterioration in VTR's operational performance in last periods has become its financial profile as one of the most leveraged in the region.
Compared with sister company Cable & Wireless, VTR combined operation benefits from the Chilean operating environment and its status as first player in fixed broadband service and the largest pay TV operator by subscriber share. Cable & Wireless strong scale, better service and geographical diversification than VTR. Following the
VTR has a similar fixed-line operating profile to
Compared with
When compared to
Key Assumptions
Start of the Combined operations VTR /Claro Chile in 2023;
Consider 30% of the projected synergies for 2025;
Claro
Slow recovery on internet subscribers;
Revenue reduction of 13% in 2022 and slightly negative to neutral the following years;
Combined EBITDA margins of around 20%;
Capex in a range of 22% to 18% in 2022-2024 period.
Key Recovery Rating Assumptions
Fitch Criteria consider bespoke recovery analysis for Issuers with IDR of 'B+' and below. The bespoke recovery analysis assumes that VTR would be considered a going concern in bankruptcy and that the company would be reorganized rather than liquidated.
Going-Concern Approach: VTR's going-concern EBITDA of
Fitch applies a waterfall analysis to the post-default enterprise value (EV) based on the relative claims of the debt in the capital structure. The agency's debt waterfall assumptions consider the company's total debt at
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Stabilization of subscriber base and EBITDA margin in the flowing 12 months-18 months, and the ability of JV Combined operation to reach relevant synergies;
Shareholder supports oriented to strength the financial flexibility and reduce the leverage;
Maintain a strong liquidity position;
Positive rating actions are possible to the extent that net debt to EBITDA sustained below 5.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade;
The inability to halt the client losses and stabilize its EBITDA margin;
Relevant Deterioration in cash position;
Lack of evidence to return to net debt/EBITDA ratios below 6.0x, in a sustained basis, at VTR.
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
Pressure on Liquidity but Comfortable Debt Schedule: VTR does not face any debt maturities until 2028 (senior secured notes of
Despite this schedule, the financial flexibility of VTR shows a relevant decrease in the last quarters, due to the reduction in FCF generation explained by the deterioration in operational performance. The company's cash balance amounted to
Issuer Profile
VTR is a relevant Telecom operator in Chilean Market. With around 2.8 million RGUs (1.2 million of internet, 1.0 million of pay TV and 0.5 million fixed telephony), the company is the second largest provider of fixed internet services (with 28% market share), closely following the leader,
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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