Fitch Ratings has affirmed TIM S.A.'s National Long-Term Rating at 'AAA(bra)'.
The Rating Outlook is Stable.
The rating reflects TIM's strong business profile supported by its relevant market share in the Brazilian mobile segment and the company's conservative financial metrics with reduced financial leverage and a robust liquidity position. Fitch expects that TIM will present solid cash flows from operations (CFFO), supported by the growth of the post-paid customer base and the average revenue per user (ARPU) and that the company is prepared to deal with the competitive and regulated telecommunications sector in Brazil, which is capital intensive and subject to rapid technological changes.
The Stable Outlook incorporates Fitch's expectation that leverage will not materially increase and that the balance sheet is strong enough to absorb investments from the 5G spectrum auction and the acquisition of Oi S.A.'s (Oi, B(bra)/Stable) mobile assets, which is expected to close in 1Q22.
Key Rating Drivers
Intense Competition: The Brazilian telecommunications sector is capital-intensive and regulated by the national agency ANATEL, which mandates coverage and quality standards. Only three major operators will remain after the Oi mobile acquisition, and this intense competition will limit the companies' pricing power. However, massive investments required to expand network capacity and coverage are a high barrier to entry. TIM's mobile market share decreased to about 21% in July 2021 from 24% in 2019, while Claro, controlled by America Movil S.A.B. de C.V. (A+/Positive), increased its market share by 2p.p. TIM was still able to increase ARPU by about 10% since 2019, while Claro's ARPU declined by approximately 8%.
Recent changes in the telecommunications sector market will require carriers to adopt leaner operational structures and offer data packages at competitive prices. Changing consumer habits and sector regulation resulted in a reduction in prepaid mobile service, with some migration to post-paid services. Fitch forecasts the total number of mobile SIM cards in Brazil will increase 3% annually, mostly driven by machine-to-machine (M2M) and internet-of-things (IoT). Fitch expects comparable increases in users of mobile and fixed broadband. In contrast, fixed-line and pay TV users should decrease 7% and 3% per year, respectively.
Strong Business Profile: TIM is the third largest mobile operator in Brazil with 51.6 million subscribers. It has solid coverage and network capacity across the country and will benefit from increased spectrum from Oi and the 5G licenses. TIM has around 800,000 fixed-line customers and residential broadband services for approximately 675,000 users. The mobile segment, including handset sales, represents 94% of TIM's total revenues, while fixed-line accounted for 6% in the LTM ended September 2021. TIM is not exposed to pay-TV revenues, which are trending downward due to new streaming technologies.
Robust Operating Cash Flows: In recent years TIM has been able to generate robust and growing operating cash flows in different macroeconomic scenarios. Fitch expects the company to generate criteria-based EBITDA of BRL6.3 billion and CFFO of BRL6.3 billion in 2021, and BRL7.4 billion and BRL5.7 billion, respectively, in 2022. This compares to EBITDA and CFFO of BRL6.7 billion in 2020. CFFO incorporates annual payments of approximately BRL50 million in 2021 and 2022 of 5G and other licenses, in addition to the retained Fistel payment estimated in BRL1.1 billion. Fitch's base scenario incorporates flat post-paid and pre-paid bases in 2021 and increases of 33% in 2022 with the incorporation of Oi subscribers.
Fitch does not expect the 5G investments to materially pressure TIM's cash flow. Capex should remain between 20% and 24% of net revenues (equivalent to BRL4.3 billion to BRL4.7 billion), aided by the network sharing agreements with Telefonica Brasil, additional spectrum from Oi that requires fewer towers, and the deconsolidation of the fiber-optic infrastructure, following the sale of 51% of FiberCo.
TIM's FCF should remain strong at BRL900 million in 2021, after dividends of BRL1 billion and before the BRL1.1 billion from the sale of FiberCo. For 2022, FCF should be nearly breakeven because of the retained Fistel's BRL1.1 billion payment. FCF does not include the acquisition of Oi mobile assets for BRL7.3 billion and other 5G investments to create Empresa Administradora de Faixas (EAF) and Entidade Administradora da Conectividade de Escolas (EACE) of approximately BRL2.4 billion in 2022. Fitch expects no dividend pressures from the controller and estimates annual amounts of around BRL1 billion per year over the next three years.
High Leverage Headroom: TIM's net leverage should remain below 1x, despite high investments and acquisitions. Net debt/EBITDA is expected to increase to 0.9x in 2022, from an average of 0.2x in 2017-2020. TIM has reinforced its cash position by issuing new debt for 5G investments and the Oi acquisition.
The company reported a net cash position of BRL2.7 billion in Sept. 30, 2021, and additional debt will partially finance part the spectrum auction (approximately BRL3.6 billion), the acquisition of Oi mobile assets, and the payment of retained Fistel taxes. Fitch projects net debt will increase by about BRL9.3 billion to BRL6.6 billion by YE2022, while liquidity should remain strong. Fitch's base case projections do not incorporate a capital increase and debt guarantees from TIM to FiberCo after the sale of its participation.
Weak Link to Telecom Italia: TIM's rating reflects the company's individual credit quality and is not currently impacted by Telecom Italia S.p.A. rating (BB+/Stable). Fitch used its 'Parent and Subsidiary Rating Linkage' criteria and views the legal and operational ties between TIM and Telecom Italia as weak. There are no cross guarantees or cross-default clauses between the companies. The Brazilian subsidiary has no overlapping of strategic positions and does not operate within the centralized treasury at Telecom Italia.
Derivation Summary
TIM is rated the same as Telefonica Brasil S.A. (AAA(bra)/Stable), which benefits from its leading position in the Brazilian telecom industry and also maintains a conservative capital structure and strong liquidity. TIM's rating is several notches above fourth-largest mobile carrier in Brazil Oi S.A. (B[bra]/Stable), which is the process of turning around its business with an asset sale program, including its mobile operations.
TIM's rating is equivalent to that of Localiza Rent a Car (AAA(bra)/Stable), which operates in the competitive Brazilian fleet and car rental sector. The rental car sector, like telecommunications, is capital-intensive. Like TIM, Localiza has robust liquidity. While Ache Laboratorios Farmaceuticos S.A.'s (AAA(bra)/Stable) scale is smaller than TIM's, the defensive nature of the pharmaceutical industry resulted in low cash flow volatility over the past five years. The company also has a solid position in the Brazilian pharmaceutical market, with a prominent share in the prescription drug segment.
Key Assumptions
Fitch's Key Assumptions Within Its Rating Case for the Issuer
Incorporation of Oi's mobile assets in 1Q22;
Mobile subscribers of 51.5 million in 2021 and 68.9 million in 2022;
Post-paid subs representing about 43% in 2021 and 41% in 2022 of the total mobile base;
Mobile ARPU growing in line with inflation;
Lines-in-service of around 830,000 in 2021 and 800,000 in 2022;
TIM Live broadband users of 680,000 in 2021 and 710,000 in 2022;
Capex of BRL4.3 billion in 2021 and BRL4.7 billion in 2022;
Dividends around BRL1 billion per year in 2021 and 2022.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Not applicable since TIM's National Scale Rating is already at 'AAA(bra)'.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Net debt/EBITDA above 2.5x, sustainably;
Adverse regulatory changes that limit TIM's margins;
Increasing competition that leads to market share reduction to levels below 20% and higher subscribers' acquisition costs;
A downgrade of Telecom Italia S.p.A. of more than one notch may lead to a downgrade of TIM.
Liquidity and Debt Structure
Strong Liquidity: Fitch expects TIM to maintain a solid liquidity position and high financial flexibility, with at least BRL2 billion in cash over the rating horizon. As of Sept. 30, 2021, cash and marketable securities were BRL7.4 billion and total debt was BRL4.7 billion, of which BRL641 million matures in the short term. TIM issued BRL2.7 billion of new debt and amortized BRL1.7 billion during the first nine months of 2021, reinforcing its cash position for the expected disbursements of approximately BRL11 billion until December 2022, which will be fully financed with additional debt of approximately BRL3 billion in 2022.
TIM has good access to the debt market. Total debt as of Sept. 20, 2021 consisted of BRL1.8 billion in loans with three financial institutions, financial leases of BRL1.7 billion, and BRL1.6 billion in debentures, deducted by BRL379 million of net derivatives. Foreign currency debt represented 27% of the total debt and is fully hedged.
Issuer Profile
TIM is the third largest mobile operator in Brazil with 51.6 million subscribers (21% market share) and offers fixed line and wired broadband services. TIM is controlled by Telecom Italia S.p.A. with a 67% stake.
Summary of Financial Adjustments
Fitch added net derivatives to TIM's debt.
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.
RATING ACTIONS
Entity / Debt
Rating
Prior
TIM S.A.
Natl LT
AAA(bra)
Affirmed
AAA(bra)
Page
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TIM S.A. 
