Fitch Affirms Telefonica Chile's IDRs at 'BBB+'; Outlook Stable

MONTERREY, Mexico–(BUSINESS WIRE)–Fitch Ratings has affirmed the following ratings for Telefonica Chile S.A.:
–Local Currency Issuer Default Rating (IDR) at ‘BBB+’;
–Foreign Currency IDR at ‘BBB+’;
–National scale IDR at ‘AA(cl)’;
–National scale short-term IDR at ‘F1+(cl)’;
–Local bonds series L, F, N and M at ‘AA(cl)’;
The Rating Outlook is Stable.
Telefonica Chile’s ratings are supported by its leading position in the Chilean fixed telecommunications market, strong cash flow generation, solid financial profile and ownership by Telefonica S.A., rated ‘A-‘ by Fitch. The ratings also reflect a strong competitive environment, low regulatory risk, weaknesses in local traffic and the policy of returning cash to shareholders. The company’s strong brand equity, leading position and operational experience should allow it to maintain a strong cash flow generation and financial profile, with relatively stable debt levels, despite competitive challenges.
Fitch views a majority ownership by Telefonica benefits Telefonica Chile in the form of operating efficiencies related to economies of scale and cost and administrative efficiencies between Telefonica Chile, Telefonica Moviles Chile S.A. (TMCH), rated ‘BBB+’ by Fitch, and its parent in Spain. In addition the company’s service offering benefits from integrated service offerings between Telefonica Chile and TMCH such as ‘BAT’ (or total broadband) which offers fixed and wireless broadband to customers.
Lower exposure to regulated revenues is balanced against the introduction of number portability by next year. Telefonica Chile’s regulated tariff services are less than 8% of revenues, which favorably compares with 50% in 2004. Fitch believes that despite a lower mix of regulated revenues over total revenues, the company continues to face competitive challenges especially in traditional voice services. Fixed number portability is expected to be introduced at the end of 2011. Telefonica Chile’s strategy of bundling services should mitigate this effect as approximately 70% of LIS are under bundled offerings, however, Fitch anticipates the company to have a negative balance of number ports due to its incumbent position.
Broadband and pay television services, offered in bundle packages, should help maintain relatively stable the cash flow generation over the next few years as local traffic from fixed lines continue to decline. Over the past few years, increases in these services have compensated pressures in traditional voice services due to increased competition and traffic migration to mobile networks. Telefonica Chile’s strategy is centered in increasing broadband accesses with bundle offerings that include voice and pay television services. This strategy contemplates increased investments to offer higher speeds and should mitigate declines in lines in service (LIS), control churn and increase loyalty within its customers.
Fitch believes the regulatory environment for Telefonica Chile has improved over the past few years. In January 2009 the antitrust authority liberalized fixed and variable charges for local services and public telephony. In addition, the tariff decree for the 2009-2014 period continues to regulate the interconnection and local access charges. The decree also set a wholesaler unbundling broadband service and number portability for fixed and mobile services by 2011. The government is exploring an initiative to introduce a sender’s keep all rule that intends to eliminate access charges between fixed networks of equivalent costs, however, this is at an early stage and the final outcome is still uncertain.
The ratings incorporate the expectation that over the long term total debt to EBITDA ratio should remain at or below 2.0 times (x). Cash flow generation should be used to maintain a conservative financial profile, make necessary investments and then return the excess cash flow to shareholders. For the 12 months ended Sept. 30, 2010, FFO adjusted leverage was 1.3x and total debt to EBITDA was 1.4x. Coverage ratios of FFO interest coverage and EBITDA to gross interest were 27.3 and 25.1x, benefiting from low interest rates.
Telefonica Chile follows conservative financial policies. As of Sept. 30, 2010 total debt after hedges amounted to CLP389 billion and the debt maturity profile is manageable. Indebtedness is primarily composed of CLP173 billion in a syndicated loan and CLP202 billion in local bonds. All the debt is denominated in local currency after hedges and only 17% is exposed to inflation through UF notes and 46% has a floating interest rate. Fitch expects that as interest rates increases, the company should continue to increase the proportion of debt with fixed rates by using hedges.
Additional information is available ‘www.fitchratings.com‘.
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