Fitch Ratings has upgraded UNE EPM Telecomunicaciones S.A.'s (Tigo UNE) Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) to 'BB' from 'B+', National Long-Term Rating to 'AA(col) from 'A-(col)', and COP unsecured notes to 'AA(col)' from 'A-(col)'/'RR4'.

Fitch has also upgraded Tigo UNE's National Short-Term Rating to 'F1+(col)' from 'F2(col)' and its CP rating under the 'Programa de Emision y Colocacion de Bonos Ordinarios y Papeles Comerciales' to 'F1+(col)' from 'F2(col)'. The Rating Outlook is Stable following the upgrade.

The upgrades and Stable Outlook reflect Tigo UNE's improved liquidity due to equity support from its two shareholders, Millicom and Empresas Publicas de Medellin (EPM), in 2023 and proceeds from recent tower sales. The company has also demonstrated its ability to access external debt financing. Fitch expects Tigo UNE's FCF generation to improve over the rating horizon as it focuses on cost control initiatives. The ratings also consider the company's governance structure.

Key Rating Drivers

Improved Liquidity: Tigo UNE's liquidity was reinforced by capital injections from its shareholders in 2023. This support also allowed it to enter into a new bank loan with Bancolombia. In January 2024 the company announced it had entered into an agreement to sell approximately 1,100 towers to KKR in a sale-and-leaseback transaction with proceeds anticipated over the coming year. Fitch expects the company to refinance its upcoming debt maturities through readily available cash and new bank debt or local bonds.

Free Cash Flow Trends: Fitch projects Tigo UNE's FCF to remain negative in 2024 but gradually improve over the rating horizon as the company implements cost cutting initiatives to improve EBITDA margins. Spectrum costs should be less of a headwind as the company benefits from its network sharing agreement with Movistar. Tigo UNE's FCF was highly pressured in 2023 due to high levels of spectrum-related capex, the impact of higher interest expense, and ongoing competitive challenges in the industry. This led to a liquidity crunch in 2H23 that ultimately resulted in the company's shareholders providing a timely equity injection.

Intense Price Competition: The Colombian mobile market is likely to continue to remain highly competitive as incumbent operators maintain promotional activity to defend market share. Fitch anticipates that industry ARPUs will continue to be particularly pressured in the post-paid segment as WOM Colombia S.A.S. seeks to become a significant player. The country's mobile penetration, which is above 150% compared with 135% in 2019, is also contributing to lower ARPU. Competition is also growing in fixed broadband. Movistar has continued their aggressive promotional strategy to gain share to fill out network capacity as demand for broadband services has slowed post-pandemic.

Defending Market Position: Tigo UNE demonstrates relative strength in the fixed home segment, a strong spectrum position aligned with its coverage strategy, and a mobile network buildout with strong post-paid data user growth. Fitch believes these factors will help the company weather WOM Colombia's entry into the country's mobile market and aggressive promotional activity in the home segment from competitor Movistar.

Broad Service Offerings: The company's service diversification compares well with other operators in the region. Tigo UNE is well-diversified across home, mobile, and B2B, with respective service revenue shares of approximately 35%, 41% and 20% during 2023. Tigo UNE operates entirely within the Colombian telecommunications market.

Parent Subsidiary Linkages: Fitch believes Tigo UNE has a weaker standalone credit profile compared to Millicom. Based on Fitch's Linkage Factor Assessment, legal, strategic, and operational incentives are assessed as low, and accordingly no uplift is considered in Tigo UNE's rating. The company's ratings incorporate weak linkages with both Empresas Publicas de Medellin E.S.P. (EPM; BB+/Negative Watch) and Millicom International Cellular S.A. (BB+/Stable). The ratings of both entities are limited by sovereign risks, the first as a Colombian government related entity and the second by the majority of its cash flows from speculative grade countries. Although UNE EPM is structured as a 50/50 joint venture (JV), of the two parent entities, Millicom exerts greater influence.

ESG - Governance: The ratings remained constrained by Tigo UNE's shareholder structure, which results in a one-notch differential from the Standalone Credit Profile. While Millicom and EPM were able to come to an agreement on an equity injection, the shareholder structure provides less financial flexibility than its peers due to a more onerous process required for financing needs.

Derivation Summary

Tigo UNE's business profile is comparable to other diversified telecom operators in Latin America; however, governance concerns and weak cash flow generation constrain Tigo UNE's ratings.

Tigo UNE's overall business is similar to that of direct competitor Colombia Telecomunicaciones (BBB-/Negative), with similar revenue shares of the overall Colombian market, although Tigo UNE has a longer history of maintaining lower leverage. Tigo UNE is also relatively stronger in the fixed broadband and pay-TV business, which could imply more subscription like cash flows, as the Colombian mobile market is still mostly prepaid.

With greater scale and diversification, Tigo UNE's business profile is somewhat stronger than 'BB' category domestic telecom peers, such as Empresa de Telecomunicaciones de Bogota, S.A., E.S.P. (ETB; BB+/Negative), while Tigo UNE's corporate governance concerns demonstrate a weaker credit profile.

Another non-investment-grade peer, Telefonica del Peru, S.A.A. (TdP; B+/Negative), has a comparatively strong but deteriorating market share in both fixed and mobile, as Peru's mobile market continues to be highly competitive while TdP's historic dominance in fixed is being challenged by fiber-based competitors. Tigo UNE carries lower leverage than TdP as TdP's profitability has suffered in recent years and has been burdened by an unfavorable outcome from a dispute with the Peruvian tax authority.

Tigo UNE is rated below Telefonica Moviles Chile S.A. (BBB-/Stable), the leading integrated telecommunications service provider in Chile. In comparison, Tigo UNE holds a secondary position in Colombia behind Claro in the fixed business and is the third largest mobile player, by market share. Both telcos operate in highly competitive markets.

Key Assumptions

Broadband and pay-TV revenue generating units (RGUs) contract slightly in 2024 due to heightened competition; pay-TV RGUs continue to be flat to down over the rating horizon while broadband RGUs will be approximately flat;

Blended home ARPUs down in 2024, due to competitive pressures in broadband and pay-TV and secular declines in fixed voice; flat-to-slightly up thereafter;

B2B revenue growth in the mid-single digits on growing demand for digital services;

Total mobile subscriptions grow in the low single digits as conversion of customers from prepaid to post-paid continues;

Blended mobile ARPUs growing modestly in the low to mid-single-digit range due to mix-shift effects from strong post-paid growth;

EBITDA margins improving to over 28% by FY2025 from trough levels of 24.1% in 2022, as cost control measures more than offset high pressures from competition;

Capital intensity around 19-20% over the rating horizon, down from ~29% in 2023, due in part to cost control efforts on non-spectrum-related capex and lower spectrum payment needs;

Gross debt/EBITDA of around 1.6x-1.9x and net debt to EBITDA of around 1.5x-1.8x over the rating horizon;

No material dividends over the rating horizon as the company focuses on investments and debt repayment.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A sale of EPM's stake to Millicom could lead to an upgrade;

Sustained (CFO-capex)/debt above 2.5%.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Continued shareholder disputes, or inability to access financing due to governance issues could lead to a multiple notch downgrade;

Deterioration in business position due to competitive pressures;

Net leverage above 3.5x.

Liquidity and Debt Structure

Improved Liquidity: Tigo UNE's liquidity has improved since the company received the joint equity contributions from company's shareholders, Millicom and EPM in 4Q23. As of Dec. 31, 2023, the company's debt totalled COP2.9 trillion, of which 93% was Colombian peso-denominated, with the remainder comprised of a USD50 million syndicated loan. The company's debt is evenly split between bank loans and COP bonds. Tigo UNE had COP122 billion in cash and equivalents as of Dec. 31, 2023.

In February 2024, the company received the disbursement of a COP85 billion bank loan and has received initial payments from the previously announced sale of towers to Towernex. The company has a COP160 billion bond maturing in May 2024, which Fitch expects that the company will have sufficient liquidity to repay. Fitch also expects the company to refinance the USD syndicated loan maturing in December 2024.

Issuer Profile

Tigo UNE is an integrated telecommunications services provider in Colombia. The company offers mobile, broadband internet, fixed telephony, and Pay-TV. The company operates as a JV between Millicom International Cellular S.A. and Empresas Publicas de Medellin (EPM).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

UNE EPM Telecomunicaciones S.A. has an ESG Relevance Score of '5' for Governance Structure due to the dynamics between its Tigo UNE's shareholders, Millicom and Empresas Publicas de Medellin (EPM), that have impacted their ability to address the company's capitalization needs. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

UNE EPM Telecomunicaciones S.A. has an ESG Relevance Score of '4' for Management Strategy due to ongoing governance concerns, which have impaired management's ability to execute on its strategy. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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