2008-04-11 23:11:40 -
- Fitch Ratings has taken the following rating actions for Transtel Intermedia S.A. (Transtel):
-- Foreign currency Issuer Default Rating (IDR) affirmed at 'CCC';
-- Local currency IDR assigned 'CCC';
-- US$170 million senior notes due 2016 affirmed at 'CCC+/RR3'.
The Rating Outlook is Stable.
Transtel's ratings incorporate the company's high leverage, limited financial flexibility
and heightened competition. These factors are balanced against a position as a niche player in Colombia's competitive local exchange market, low debt maturities over the next few years and moderate regulatory risk. Transtel is exposed to competition from larger local exchange incumbents and increased substitution of fixed-line telephony by mobile traffic. The US$170 million senior notes rating of 'CCC+/RR3' reflects good recovery prospects given default.
Transtel's leverage remains high despite stable debt levels, which limits the company's financial flexibility. For the 12 months ended Sept. 30, 2007, total debt-to-EBITDA was 5.2 times(x), EBITDA-to-gross interest expense was low at 1.3x and adjusted EBITDA-to-cash interest expense was approximately 1.5x. Cash flow to meet 2008 maturities of US$8.2 million is expected to be tight. In addition, Transtel has low financial flexibility with low cash balances and limited access which adds to near-term refinancing risks despite the low level of debt amortization.
Transtel operates a state of the art 100% digital network that provides economies of scale and allows it to offer quality voice and data services. The network has enough capacity to meet its growth strategy over the next few years. As a result, capital expenditures are expected to be at minimal levels and free cash flow generation can be used to slightly decrease debt over the next couple years.
Transtel is well positioned to offer unregulated bundled services that include voice and broadband services, as well as video services in Cali. This strategy has helped the company to reduce and control churn rate, increase profitability and penetration. Future operating strategy continues to lever the unused installed capacity of its network in Cali, where good demographics and low market share by the company provides a good opportunity to increase its subscriber base by directly competing with incumbent, municipally owned Emcali. Transtel has leading market shares in Palmira, Cartago and Girardot, where about 50% of revenues are generated.
Local traffic has been weak over the past few years, reflecting migration of local traffic to mobile from fixed networks. Increases in lines in service and growth in Internet and pay television users have not been sufficient to compensate for revenue loss on local services. Broadband penetration in Colombia is low and offers an attractive opportunity over the medium term to enhance revenues and to help retain LIS with the offering of unregulated bundle services.
Regulatory risk seems moderate for Transtel. In 2006, the industry switched to charging for minutes versus pulses, which was not expected to significantly affect the revenues of the company. Local service plans are regulated if market share exceeds 60%. Transtel has approximately 27% of its LIS under a regulated regime, while most of its LIS (63.9%) as under a monitored pricing model. This model allows the company to freely set rates with the only condition of registering the rates with the regulator. Under a regulated regime, the regulator determines a price cap for the rates of several services by the use of certain formulas and methodologies.
Transtel controls and operates seven telephone systems and one cable system serving residential and commercial subscribers in ten cities including Cali and its metropolitan area, the municipalities of Popayan and Jamundi. The company offers local telephone, data, internet and to a lesser extent pay television services. At Dec. 31, 2007 Transtel had, over 228,000 lines in service, 38,000 internet subscribers including 16,400 broadband users and 12,800 pay television subscribers. Revenues and EBITDA for the LTM ended Sept. 30 2007 amounted to approximately US$55 million and US$36 million respectively.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Sergio Rodriguez, CFA, +52 (81)8335-7179 (Monterrey)
Mauro Storino, +55 21 4503-2600 (Rio de Janeiro)
Media Relations: Christopher Kimble, +1-212-908-0226
(New York)
