This report does not constitute a rating action.

Frequently Asked Questions

Persistently high competition in the Chilean market, together with high inflation and interest rates, has taken a toll on Chilean telecom companies. Since Wom S.A.'s (B/Stable/--) disruptive entrance into the market during 2015, several telecom operators have been struggling to retain their market shares, experiencing increases in customer churns and reduction in average revenue per user (ARPU). Additionally, the higher cost of capital pushed telecom operators around the world to sell assets to lighten their balance sheets by selling and leasing back infrastructure assets. This trend in general weakened the Chilean players' capital structures, as a large share of the proceeds has been upstreamed as dividends. Finally, current macroeconomic headwinds are making even more difficult to keep margins in line with historical levels. Below, S&P Global Ratings addresses frequently asked questions about the impact of competition, inflation, debt, and near-term prospects for Chilean telecom operators.

What are the near-term challenges for Chilean telecom operators?

Stiff competition, inflation, and high investments needed to expand network capacity, fiber-to-the-home (FTTH) deployment, and the rollout of 5G technology crimped EBITDA margins and cash flow in 2022. We expect fierce competition to continue, but we're starting to see some rationalization in the market, in the form of price increases or reduction of promotional activity. Additionally, some operators have implemented cost-efficiency measures. This could help ARPUs and margins to stabilize towards the end of the year after a bumpy start. However, several near-term factors could exacerbate margin deterioration and cash-flow deficits that could hike leverage and delay the improvement in credit metrics. These include:

• Higher costs associated with the wholesale connectivity contract to access fiber network. In 2021, Telefonica Moviles Chile S.A. (TMC; BBB-/Negative/--) sold its majority stake in its fiber assets and entered into a wholesale connectivity contract with OnNet Fibra to access its fiber, increasing its operating costs and denting EBITDA margins. Empresa Nacional de Telecomunicaciones S.A. (Entel; BBB-/Stable/--) also entered an agreement to sell its fiber-optic infrastructure assets to OnNet Fibra, which regulators haven't yet approved. We believe that the sale could squeeze the company's profitability, depending on the final terms of the connectivity contract.
• Aggressive capital investments. We believe that telecom operators will continue to invest in their networks to continue increasing network capacity and quality, mainly in the 5G deployment, the expansion of their fixed broadband network in homes, and further development of IT and digital projects. This could increase capital requirements, crimping cash flow generation.
• High dividend payments. We believe that Entel, Wom, and TMC will continue to upstream excess cash to shareholders. For instance, Entel revised upward its dividend policy in 2022 to up to 80% of its net income from up to 50%. For Wom, we believe that as long as It has excess cash and complies with financial restrictions, its financial sponsor could continue upstreaming dividends or investments from Wom or could further use the company as a vehicle to partly finance the Colombian operations. Although we don’t expect TMC to pay dividends for 2023, we expect the company will continue upstreaming 100% of free cash flow, as it has done in the past, during the next few years.
• High interest rates: Although the Chilean central bank reduced interest rates by 100 basis points in July 2023, we expect most of the operators will continue using debt to fund investments and repay outstanding maturities. Therefore, they will need to access capital markets at some point in 2023 or over the next couple of years.

Why did S&P Global Ratings revise its outlook on TMC to negative?

On Aug. 8, 2023 we revised our outlook on TMC to negative from stable. The outlook revision on TMC reflects our expectations of weaker profitability and leverage metrics, and that the company has operated with tighter liquidity in the past few quarters. The persistently high competition in the Chilean market, coupled with weaker macroeconomic conditions, has eroded TMC's ARPUs and margins in the last couple of years. Although TMC has expanded its mobile postpaid base by 20% between 2020 and June 2023, ARPUs have dropped by more than 13% in the same period.

In addition, following the decision to sell a controlling stake in its fiber business to OnNet in 2021, the company has adopted a higher tolerance for leverage than in the past. TMC upstreamed the sale proceeds to its Spain-based parent, Telefonica S.A., while its EBITDA contracted after the company entered into a wholesale agreement with OnNet for the use of the fiber network. Consequently, as of June 2023, TMC posted adjusted EBITDA margins of 19.6%, down from 29% in December 2020, and leverage peaked at 4.0x. We now expect this ratio to range between 2.7x and 3.0x in 2023 and 2024. The increase in leverage and drop in margins would prompt us to downgrade TMC to 'BB+' unless EBITDA margins rise above 20% (we currently expect margins of 19%-20% for the next two years) or if leverage remains below 3x and the company continues to generate free operating cash flow.

Why did S&P lower the ratings on WOM and is there any rating upside?

On April 21, 2023, we lowered the ratings on Wom to 'B' from 'B+' and kept the stable outlook. The downgrade reflects the financial sponsor's higher-than-expected leverage tolerance. Unlike its peers, Wom's revenue and margins increased consistently. We estimate revenue to grow by 9% in 2023 year on year and EBITDA margin could rise to 32% by year end from 29.9% in 2022. Yet credit metrics have remained weaker than expected amid higher dividend payout and debt. Wom's investments including its participation in the 5G bidding in 2021, the recent option to sell and lease back towers and invest in Wom Colombia, coupled with cash upstreams (in the form of dividends or loans) to the sponsor have caused significant delays in deleveraging. The debt metric peaked at 5.8x in 2022, and we believe could still exceed 5.0x in 2023.

Rating upside will depend on improved finances. We could upgrade Wom if its adjusted leverage drops below 5x while its business remains resilient and generates free cash flow. Such a scenario would also require Wom's owner to prioritize debt repayment. Given currently difficult macroeconomic and industry conditions in Chile, we estimate the company's debt to EBITDA ratio will fall below 5x by 2024. Any rating upside would also require the refinancing of the company's 2024 senior unsecured notes.

How much of the cushion exists in the 'BBB-' ratings on Entel?

We could downgrade Entel if its debt to EBITDA is close or above 3.5x on a sustained basis and discretionary cash flow remains negative. Entel posted weaker-than-expected performance last year, but we expect credit metrics will remain in line with the 'BBB-' rating by the end of 2023 and in the following two years. As of June 2023, rolling twelve-month revenue declined by 3.1%, while adjusted EBITDA margins dropped to 26.3% and leverage peaked at 3.7x.

We believe Entel will improve its results in the second half of 2023 given rate readjustments and the implementation of cost efficiencies. In addition, we expect stronger aggregated margins thanks to improved customer mix in its Peruvian operations. These factors should raise adjusted EBITDA margins to about 29% and drop leverage to 2.8x-3.0x for the next couple of years. Nevertheless, we expect Entel to preserve cash flow, if necessary, by either cutting dividends or capex in order to keep leverage on track.

The negative rating action may arise from persistently sizable capex plans and/or dividend payments that keep leverage above 3.5x, or if revenues don't grow as expected and profitability deteriorates, with margins falling below 25%.

What is S&P's view on the Claro/VTR joint venture and on what is the 'CCC' rating on VTR based?

In October 2022, VTR Finance N.V. (VTR; CCC/Developing/--) and Claro Chile (Claro) merged and became a joint venture (JV), which Liberty Latin America Ltd. (LLA; not rated) and America Movil S.A.B. de C.V. (AMX; A-/Stable/--) equally own. We believe the JV could enhance VTR's credit profile as it would benefit from synergies and a larger and more diversified business profile. However, we currently don't have clarity on the JV's business plan or financial policy, or concrete information regarding JV's potential support to VTR's credit quality. On May 29, 2023, VTR released supplemental information regarding the JV--both shareholders have agreed on near-term funding of the JV, which will primarily occur through convertible shareholder loans. Since January 2023, AMX has been paying down Claro's outstanding debt. As a result, the JV doesn't have third-party debt currently outstanding outside VTR. We believe that LLA would provide support to the JV in equal portion to that of AMX otherwise there could be changes in the ownership structure.

On May 25, 2023, we downgraded VTR to 'CCC' from 'B'. The downgrade followed our belief of the increasing risk of a near-term default. The company made the interest payment in July, and we estimate that it has enough sources to cover October interest payments too. But VTR will require external financing or need to sell assets to meet its liquidity needs in the next 12 months. Despite the announced financial support from shareholders, we currently don’t have clarity on when and in what form VTR will receive it, so liquidity risks remain. In our opinion, VTR's funding needs will be higher than upcoming debt payments as it needs to fund operations and its capex for its operations to recover, but also to strengthen its capital structure while the business picks up. According to our base-case scenario, absent any unexpected favorable development, VTR's capital structure will remain unsustainable for the next three years, as we forecast debt to EBITDA between 11x and 13x through 2025. Also, our developing outlook on VTR means that we could lower the ratings if the company misses a coupon payment or engages in any type of debt restructuring that we consider as distressed. We could raise the ratings if we have more clarity on the JV's business plan to turn around the business and potential support to VTR to bolster its liquidity position, reducing risks of missed payments or debt restructuring. Additionally, an upgrade above the 'CCC' category would depend on a considerable debt reduction to bring leverage to more sustainable levels.

Related Research

• Chilean Telecom Operator Wom S.A. Downgraded To 'B' From 'B+' On Persistently Higher Leverage, Outlook Stable, April 21, 2023
• Empresa Nacional de Telecomunicaciones S.A., June 30, 2023
• VTR Finance N.V. Downgraded To 'CCC' From 'B' On Continued Cash Burn And Deteriorating Liquidity, Outlook Developing, May 25, 2023
• Telefonica Moviles Chile S.A. Outlook Revised To Negative From Stable On Weaker Metrics; 'BBB-' Ratings Affirmed, August 08, 2023