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CORPORATES
CREDIT OPINION26 February 2019
Update
RATINGS
UNE EPM Telecomunicaciones, S.A.Domicile Colombia
Long Term Rating Baa3
Type LT Issuer Rating - FgnCurr
Outlook Stable
Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.
Contacts
Marcos Schmidt +55.11.3043.7310VP-Senior [email protected]
Marianna Waltz, CFA +55.11.3043.7309MD-Corporate [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
UNE EPM Telecomunicaciones, S.A.Update to credit analysis
SummaryUNE EPM Telecomunicaciones, S.A.'s (Tigo-Une) Baa3 issuer rating reflects the company'sstrong competitive position in Colombia as the second-largest telecom service providerin terms of revenue, and its diversification into a full suite of services, which supports itsearnings and cash flow stability. The rating also takes into account the company's strongdebt protection metrics and its adequate liquidity for a relatively comfortable debt maturityprofile. Tigo-Une's strong shareholder structure and positive free cash flow over the past twoyears helped its deleveraging to 2.1x adjusted gross debt/EBITDA in the 12 months endedSeptember 30, 2018 from 2.4x as of year-end 2017. We expect positive free cash flow for thenext three years and a further deleveraging toward 2.0x or less, which is already factored intothe Baa3 rating.
At the same time, the Baa3 rating takes into account the intense competition in a price-sensitive environment, which weighs on profitability and organic growth, despite positiveunderlying subscriber trends. Although some regulatory initiatives have attempted to weakenthe competitive capacity of Colombia's dominant mobile operator America Movil, S.A.B deC.V.'s (A3 stable) subsidiary Claro, others have hurt profitability and increased competitionamong smaller entities such as Tigo-Une. The company's positive free cash flow generation isexpected to be sustained but at only moderate levels. Tigo-Une's rating also reflects its smallscale relative to its global peers.
Credit strengths
» Good revenue diversification, which supports earnings and cash flow stability
» Strong competitive position as Colombia's second-largest telecom service provider
» Strong debt protection metrics, adequate liquidity and comfortable debt maturity profile
» Strong shareholder structure, which includes Millicom International Cellular S.A.(Millicom, Ba1 stable) and Empresas Publicas de Medellin E.S.P (EPM, Baa3 negative)
» Expectation of further deleveraging through positive free cash flow generation
MOODY'S INVESTORS SERVICE CORPORATES
Credit challenges
» Intense competition in a price-sensitive environment
» Regulatory initiatives, which have hurt profitability and increased competition
» Positive free cash flow generation, which is expected to be sustained only at moderate levels
» Small scale relative to global peers
Rating outlookThe stable outlook reflects our expectation that Tigo-Une's performance will be characterized by positive momentum as a consequenceof an expanding customer base in a more rational market environment, with less regulatory impact and lower capital spending. As such,we expect the company's profitability to expand, free cash flow generation to increase and leverage to decline, while it maintains itsmarket participation, capital spending and liquidity at adequate levels.
Factors that could lead to an upgrade
» Increase in market share to a level closer to that of the market leader
» Better-than-expected improvements in credit metrics, while maintaining a good competitive position
» Sustained revenue growth and strong profitability
» Leverage declining to 2.0x or lower on a sustained basis
» Retained cash flow/total debt of 25% or higher on a sustained basis
Factors that could lead to a downgrade
» Inability to maintain its market position and profitability in a more aggressive competitive scenario
» Cash burn and increase in leverage to finance capital spending and activities
» Weaker liquidity and negative free cash flow generation from excessive dividend payouts
» Increase in leverage to a level higher than 3.5x for a prolonged period
Key indicators
Exhibit 1
UNE EPM Telecomunicaciones, S.A.UNE EPM Telecomunicaciones, S.A.
USD Billions Dec-14 Dec-15 Dec-16 Dec-17
LTM
(Sep-18) Next 12 - 18 Months Forward View
Revenue $1.9 $2.0 $1.7 $1.7 $1.8 $1.7 - $2
Debt / EBITDA 2.6x 2.3x 2.4x 2.4x 2.1x 2x - 2.75x
RCF / Debt -15.3% 28.6% 16.7% 27.0% 31.3% 25% - 35%
(EBITDA - CAPEX) / Interest Expens 2.2x 1.7x 0.9x 1.6x 2.0x 1x - 2x
All figures and ratios are calculated using our estimates and standard adjustments. Our Forecasts (f) or Projections (proj.) are our opinion and do not represent the views of the issuer.Periods are fiscal year-end unless indicated. LTM = Last 12 months.Source: Moody's Financial Metrics™
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.
2 26 February 2019 UNE EPM Telecomunicaciones, S.A.: Update to credit analysis
MOODY'S INVESTORS SERVICE CORPORATES
ProfileUNE EPM Telecomunicaciones, S.A. (Tigo-Une) is an integrated telecom service provider in Colombia offering mobile, fixed, pay TVand business-to-business services. It is Colombia’s second-largest telecom company in terms of revenue, second-largest fixed and payTV operator (over 3.7 million revenue generating units) and third-largest mobile operator (over 7.7 million subscribers). The companyis Millicom International Cellular S.A.’s (Millicom) single-largest subsidiary in terms of revenue, accounting for around 30% of itsconsolidated sales in 2018, and second-largest in terms of EBITDA, accounting for around 24%, making Colombia Millicom’s largestmarket. For the 12 months ended September 2018, Tigo-Une generated revenue of around $1.75 billion.
Tigo-Une is controlled by Millicom, which holds 50% minus one share, while Empresas Publicas de Medellin E.S.P does not control thecompany but has a significant participation of 50% plus one share.
Detailed credit considerationsMerger brought scale and revenue diversificationTigo-Une is the result of the merger concluded in August 2014 between Millicom Spain Cable S.A. — a subsidiary of Millicom and theformer majority shareholder of the mobile telecom operator Colombia Móvil S.A. (Tigo) — and Une — a broadband internet, fixedtelephony and TV operator then owned by EPM, which is a wholly owned subsidiary of the City of Medellin (Baa2 negative). Now,Tigo-Une is controlled by Millicom, which holds 50% minus one share. While EPM does not control the company, it has a significantparticipation of 50% plus one share. Despite the size and importance of Tigo-Une's shareholders, the Baa3 rating does not benefit fromany formal support or rating uplift from its ownership structure.
Tigo-Une has a small scale relative to its global peers, but the company is a solid competitor in Colombia's telecom market, positionedas the second-largest entity in the fixed telephony market and the third in mobile. The company's good revenue diversification andaccess to Millicom's branding strategy, emerging markets expertise, and regional purchasing and supply chains support its solid businessmodel. Its revenue is distributed somewhat evenly across all segments, with both home and mobile contributing with around 35%,business-to-business segments with around 22%, and others with around 8%. Despite intense competition, we expect Tigo-Une'sperformance over the next several quarters to be characterized by its positive momentum as a consequence of an expanding customerbase in a more rational market environment, with less regulatory impact, growing EBITDA and a steady capital spending of $300-$330million over the coming years.
Revenue trend accelerates and margin expected to followDespite ongoing top-line operational pressures for the last two years — reflecting a mix of intense competition, unfavorable regulatoryimpact, slower economic expansion and a delay in government-related contract closures in 2016 — the worst seems to have passed,with sales showing a small but positive growth of 0.4% for the 12 months ended September 2018.
Between 2015-17, Tigo-Une experienced a slight, although sustained, decline in revenue, but maintained its EBITDA margin close to30%, which we consider moderate compared with those of its peers in the region, but still aligned with the rating category. Now, witha positive momentum and the expansion of its customer base specially in mobile data, pay TV and internet, we expect the company toincrease its EBITDA margin to above 30% by 2019, which would be more aligned with its peers in the region.
While the evolution of Tigo-Une’s long-term business plan could push margins slightly above 30% by 2019, further margin expansionwill be limited. This is because given the existing business mix, Une, on a standalone basis, has a lower operating margin than themobile business. The Colombia-based call center and the company's challenging market position in the mobile segment are alsoconstraints to further margin expansion.
In addition, the company has been pursuing cost-cutting initiatives to achieve a lighter cost structure.
Cash generation and lower dividend upstreamA more steady capital spending of $300-$330 million for the coming years and a more conservative shareholder policy will help thecompany to keep recording a positive free cash flow, although still sustained at moderate levels.
3 26 February 2019 UNE EPM Telecomunicaciones, S.A.: Update to credit analysis
MOODY'S INVESTORS SERVICE CORPORATES
Despite Tigo-Une’s history of upstreaming most of its excess cash to shareholders, the company has paid only a small amount ofdividends during 2017-18 and has been focusing on debt reduction and lengthening its debt maturity profile, which is already up to2036.
The company's capital spending needs will decline both on an absolute basis and in relation to revenue through 2023, from $350million in 2016 (21% of revenue) to $300 million-$330 million (17%-19% of 2017 revenue), of which around one-third should beinvested in expansion.
LeverageWe expect leverage to decline as the company directs its excess cash flow toward debt reduction through at least 2023. Thecombination of a lighter debt balance and organic EBITDA growth will bring gross debt/EBITDA to 2.0x or less by year-end 2019 from2.4x in 2017, which will be more compatible with the company's Baa rating category.
Exhibit 2
Evolution of gross adjusted leverage (in $ millions), as of September 2018UNE EPM Telecomunicaciones, S.A.
2.6x2.3x
2.4x 2.4x
2.1x
2.0x
$482 $486 $532 $561
$600 $651
$1,251
$1,103
$1,290 $1,333
$1,283 $1,300
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
2014 2015 2016 2017 LTM Sep/18 2019e
US
D M
illio
n
EBITDA Debt Debt/EBITDA
All ratios are based on 'Adjusted' financial data and incorporate our Global Standard Adjustments for Non-Financial Corporations.Source: Moody's Financial Metrics™
Regulatory environment to favor smaller entities, but competition remains intenseRegulations in Colombia have imposed asymmetric measures on incumbent entities, favoring smaller companies and new entrantsin any given segment. As a dominant company, America Movil, S.A.B de C.V. must meet the requirements for unbundling and theprovision of wholesale services. The company had been subject to asymmetric interconnection rates for mobile services from 2012 toyear-end 2016.
Other regulatory measures include capped spectrum tenancy, the elimination of mandatory contract terms through subsidizing and thesale of unlocked handsets so customers can easily switch between operators.
Although regulatory initiatives have attempted to weaken the competitive capacity of Colombia’s dominant mobile operator, otherinitiatives have hurt profitability and increased competition among smaller entities such as Tigo-Une.
Migration to competing operators is easier now than it was in previous years, following the elimination of handset subsidies, ceasingof mandatory contract duration terms and the sale of unlocked handsets. The sale of unlocked handsets has resulted in a decline inequipment revenue, given that phones are now sold more frequently through indirect channels. Most recently, Tigo-Une’s revenueand cash flow declined, following a regulatory shift involving a combination of lower mobile termination rates, mobile virtual networkoperators and national roaming tariffs, as well as the mandated decommissioning of its fixed wireless network.
Liquidity analysisTigo-Une's liquidity is adequate. As of September 2018, the company had around $160 million in cash and equivalents, with no short-term debt. In accordance with our forecast through 2020, its cash generation will be more than sufficient to cover all basic obligations,
4 26 February 2019 UNE EPM Telecomunicaciones, S.A.: Update to credit analysis
MOODY'S INVESTORS SERVICE CORPORATES
capital spending and debt maturities. The company has a comfortable debt maturity profile, with around $50 million coming due in2020. The company's next major debt maturities of around $200 million are due in 2021, however the company is already negotiatingthe lengthening of this syndicated loan. Tigo-Une does not have any committed credit facilities.
Exhibit 3
Debt amortization schedule (in COP millions) as of September 2018UNE EPM Telecomunicaciones, S.A.
150 160
30
125
500
150
633
316
180
285 245 254
130 130 120 120 126
-
100
200
300
400
500
600
700
Cash &Equivalents
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2036
CO
P M
illio
n
Bonds Banks Syndicated Loan
All ratios are based on 'Adjusted' financial data and incorporate our Global Standard Adjustments for Non-Financial Corporations.Source: Company's financials
Rating methodology and scorecard factorsThe grid-implied rating from our 12-18-month forward view under the Telecommunications Service Providers rating methodology isBa1, one notch below Tigo-Une's current issuer rating of Baa3. The one-notch difference reflects the company's significant market shareand scale in the Colombian telecom market, and its smaller size than its international peers.
Exhibit 4
Rating factorsUNE EPM Telecomunicaciones, S.A.
Rating Factors
UNE EPM Telecomunicaciones, S.A. -Private
Telecommunications Service Providers Industry Grid [1][2]
Factor 1 : Scale (12.5%) Measure Score Measure Score
a) Revenue (USD Billion) $1.8 Caa $1.7 - $2 Caa
Factor 2 : Business Profile (27.5%)
a) Business Model, Competitive Environment and Technical Positioning Ba Ba Ba Ba
b) Regulatory Environment Ba Ba Ba Ba
c) Market Share Baa Baa Baa Baa
Factor 3 : Profitability and Efficiency (10%)
a) Revenue Trend and Margin Sustainability Ba Ba Ba Ba
Factor 4 : Leverage and Coverage (35%)
a) Debt / EBITDA 2.1x Baa 2x - 2.75x Baa
b) RCF / Debt 31.3% Baa 25% - 35% Baa
c) (EBITDA - CAPEX) / Interest Expense 2.0x B 1x - 2x B
Factor 5 : Financial Policy (15%)
a) Financial Policy Baa Baa Baa Baa
Rating:
a) Indicated Outcome from Scorecard Ba1 Ba1
b) Actual Rating Assigned Baa3
Current
LTM 9/30/2018
Moody's 12-18 Month Forward View
As of 2/13/2019 [3]
[1] All ratios are based on 'Adjusted' financial data and incorporate our Global Standard Adjustments for Non-Financial Corporations.[2] As of 9/30/2018(L).[3] This represents our forward view, not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.Source: Moody's Financial Metrics™
5 26 February 2019 UNE EPM Telecomunicaciones, S.A.: Update to credit analysis
MOODY'S INVESTORS SERVICE CORPORATES
Appendix
Exhibit 5
Peer comparison tableUNE EPM Telecomunicaciones, S.A.
(in USD Millions)
FYE
Dec-16
FYE
Dec-17
LTM
Sep-18
FYE
Dec-16
FYE
Dec-17
LTM
Sep-18
FYE
Dec-16
FYE
Dec-17
LTM
Sep-18
FYE
Dec-16
FYE
Dec-17
LTM
Sep-18
FYE
Dec-16
FYE
Dec-17
LTM
Sep-18
Revenues $1,690 $1,715 $1,752 $4,105 $4,133 $4,234 $641 $680 $654 $12,254 $13,534 $12,449 $545 $553 $544
EBITDA $524 $568 $613 $1,587 $1,601 $1,720 $331 $368 $349 $5,070 $5,721 $5,979 $249 $255 $254
Total Debt $1,289 $1,334 $1,284 $4,449 $4,456 $4,315 $364 $341 $326 $7,032 $6,446 $4,819 $416 $506 $524
Cash & Cash Equivalents $110 $188 $168 $646 $619 $758 $182 $206 $263 $1,569 $1,221 $930 $54 $87 $17
EBITDA Margin 31.0% 33.1% 35.0% 38.7% 38.7% 40.6% 51.7% 54.1% 53.4% 41.4% 42.3% 48.0% 45.7% 46.2% 46.7%
(EBITDA-CAPEX) / Interest Expens 0.9x 1.6x 2.0x 1.5x 1.7x 2.1x -0.3x 9.8x 5.7x 3.6x 4.2x 6.9x 3.1x 3.7x 2.8x
Debt / EBITDA 2.4x 2.4x 2.1x 2.8x 2.8x 2.5x 1.1x 0.9x 0.9x 1.3x 1.2x 0.9x 1.7x 2.0x 2.2x
FCF / Debt -10.0% 2.7% 5.3% -2.4% -0.6% 3.0% -22.2% -24.7% -19.9% 4.4% 2.8% -11.0% 11.6% -8.1% 13.1%
RCF / Debt 16.7% 27.0% 31.3% 18.3% 18.8% 25.0% 56.3% 62.1% 56.1% 63.9% 70.6% 86.4% 39.2% 14.0% 36.9%
UNE EPM Telecomunicacion Millicom International Cellu Empresa Nacional de Telecomu Telefonica Brasil S.A. Telefonica Celular Del Parag
Baa3 Stable Ba1 Stable Ba3 Stable Ba1 Stable Ba2 Positive
All figures and ratios calculated using our estimates and standard adjustments. FYE = Fiscal year-end. LTM = Last 12 months. RUR* = Ratings under review, where UPG = for upgrade andDNG = for downgrade.Source: Moody's Financial Metrics™
Exhibit 6
Moody's-adjusted debt breakdownUNE EPM Telecomunicaciones, S.A.
(in USD Millions)
FYE
Dec-14
FYE
Dec-15
FYE
Dec-16
FYE
Dec-17
LTM Ending
Sep-18
As Reported Debt 1,160.2 964.5 1,142.8 1,130.3 1,079.7
Pensions 0.0 0.0 -57.7 -59.6 -59.9
Operating Leases 90.7 138.1 203.7 263.1 264.4
Non-Standard Adjustments 0.0 0.0 0.4 0.0 0.0
Moody's-Adjusted Debt 1,250.9 1,102.5 1,289.1 1,333.8 1,284.2
All figures and ratios are calculated using our estimates and standard adjustments.Source: Moody's Financial Metrics™
Exhibit 7
Moody's-adjusted EBITDA breakdownUNE EPM Telecomunicaciones, S.A.
(in USD Millions)
FYE
Dec-14
FYE
Dec-15
FYE
Dec-16
FYE
Dec-17
LTM Ending
Sep-18
As Reported EBITDA 500.4 418.5 476.4 514.1 541.3
Operating Leases 36.1 33.5 64.4 59.2 60.0
Unusual 37.6 116.2 -16.9 -5.6 12.1
Moody's-Adjusted EBITDA 574.0 568.1 523.9 567.7 613.4
All figures and ratios are calculated using our estimates and standard adjustments.Source: Moody's Financial Metrics™
6 26 February 2019 UNE EPM Telecomunicaciones, S.A.: Update to credit analysis
MOODY'S INVESTORS SERVICE CORPORATES
Ratings
Exhibit 8Category Moody's RatingUNE EPM TELECOMUNICACIONES, S.A.
Outlook StableIssuer Rating Baa3
PARENT: MILLICOM INTERNATIONAL CELLULAR S.A.
Outlook StableCorporate Family Rating Ba1Senior Unsecured Ba2
Source: Moody's Investors Service
7 26 February 2019 UNE EPM Telecomunicaciones, S.A.: Update to credit analysis
MOODY'S INVESTORS SERVICE CORPORATES
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REPORT NUMBER 1160780
8 26 February 2019 UNE EPM Telecomunicaciones, S.A.: Update to credit analysis
MOODY'S INVESTORS SERVICE CORPORATES
Contacts
Nikolas Pinto +55.11.3043.7340Associate [email protected]
Marcos Schmidt +55.11.3043.7310VP-Senior [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
9 26 February 2019 UNE EPM Telecomunicaciones, S.A.: Update to credit analysis
