FITCH affirms Globe Telecom's ratings, outlook stable

December 09 (Fitch) Fitch Ratings has today affirmed Philippine-based Globe Telecom’s (Globe) Long-term foreign currency Issuer Default Rating (IDR), Long-term local currency IDR and the rating of its outstanding global bonds and senior notes at ‘BB+’, as well as its National Long-term rating at ‘AAA(phl)’. The Outlook is Stable.
Globe’s ratings reflect the increasing pressure on its wireless segment, which is the mainstay of its overall financial profile. The wireless segment is facing declining revenues and operating margins due to intensified competition, multi-SIM usage, and increasing adoption of “unlimited plans” by subscribers. Although Globe’s fixed-line and broadband segment is performing well and growing in terms of both revenue and EBITDA, this growth is not able to completely offset the declines in the wireless segment. Fitch notes that Globe’s revenues and margins were also negatively affected by the rising Peso during the nine months to end September 2010 (9M10). As a result of lower EBITDA, Globe’s FFO adjusted net leverage rose to 1.8x (end-2009: 1.6x).
The agency also has some concerns regarding Globe’s increasing shareholder focus — it distributes dividends in the range of 75%-90% of its net income. Fitch expects Globe’s operating cash flows to remain under pressure due to lower EBITDA from the wireless segment, and will therefore be marginally short for meeting its dividend commitments after meeting its capex requirements.
However, Globe’s ratings reflect its position as the entrenched number two telecom operator in the Philippines with EBITDA margins over 50%, and its strong presence in the domestic wireless sector (33% of revenue market share as at end-September 2010). Fitch positively notes Globe’s focus on increasing its broadband revenues by encouraging greater internet adoption among Philippine subscribers over both fixed-line and wireless infrastructures. A meaningful contribution towards EBITDA from broadband services is expected most likely in 2012, and beyond.
Fitch views Globe’s liquidity as adequate at end-September 2010, with cash and equivalents of PHP5.3bn, and available uncommitted short-term facilities of USD59m and PHP11.0bn, which comfortably cover debt maturities of PHP1.32bn in 2010 and PHP8.74bn in 2011. Its liquidity profile is further enhanced by strong access to banks and capital markets.
Fitch notes that increasing adoption of fixed-line and wireless broadband services tends to cannibalise wireless data (mainly SMS), as well as National long distance (NLD) and International long distance (ILD) service revenues to some extent. Compared to Asia-Pacific peers, the impact is much higher for telecom operators in the Philippines since SMS revenues represent almost 48% of total wireless revenues. Accordingly, the uptake of lower-margin wireless and fixed-line broadband services is likely to place downward pressure on the Philippine telcos’ existing SMS, NLD and ILD service revenues and consolidated margins.
The Stable Outlook reflects the expectation that Globe will maintain its entrenched position in the Philippine telecommunications sector, notwithstanding increased competition. Furthermore, the company’s leverage metrics are expected to remain comfortable for the rating category through 2011. This is based on the assumption that 2011 capex will be similar to the capex guidance of USD500m (PHP21.5bn) for 2010 and that total shareholder returns remain broadly in line with 9M10 levels of PHP80 per share.
However, Globe’s ratings could come under downward pressure in the event of debt-funded acquisitions, capital management initiatives or a sharp deterioration in the company’s operating profile, which results in FFO adjusted net leverage exceeding 2.5x. Globe’s local currency IDR might be upgraded if the competitive environment stabilises and if, as Fitch expects, its FFO adjusted net leverage falls below 1.5x on a sustained basis. Globe’s foreign currency IDR is effectively capped by the Philippines’ Country Ceiling rating, and an upgrade or downgrade of the Country Ceiling would result in a similar change to the former rating.
Globe is the second largest telecommunications operator in the Philippines and the only credible challenger to the incumbent Philippine Long Distance Telephone company (Foreign currency IDR: ‘BB+’/Stable). The company is majority-owned by Singapore Telecommunications (‘A+’/Stable) and the Ayala Corporation, which held 47.33% and 30.46% respectively, of shares of common stock at 30 September 2010. Globe had 25.4 million cellular subscribers, 1 million broadband subscribers and around 600,000 fixed-line subscribers at end-September 2010.
Article via Reuters