Fitch affirms Liberty Communications of Puerto Rico at 'B+'; outlook stable

Fitch Ratings -Chicago-29 September 2020:

Fitch Ratings has affirmed all of Liberty Communications of Puerto Rico LLC's (LCPR) ratings, including the Long-Term Foreign Currency Issuer Default Rating (IDR) at 'B+'. In addition, Fitch has affirmed the 'BB-'/'RR3' ratings on the company's secured debt, LCPR's revolving credit facility, LCPR Loan Financing LLC's 2026 Term Loan, and LCPR Senior Secured Financing Designated Activity Company's 2027 notes.

The affirmation reflects the company's recovery from the hurricanes, including the improvement in LCPR's financial profile and the restoration of service. The company's senior secured debt is rated one notch above the IDR due to above-average recovery prospects.

LCPR's ratings continue to reflect the company's strong business position in pay-TV and broadband services in Puerto Rico. The ratings are tempered by LCPR's lack of geographic diversification, making it vulnerable to weak macroeconomic conditions in Puerto Rico. In October 2019, LCPR announced the acquisition of AT&T Inc .'s (ATT; A-/Stable) operations in Puerto Rico and the U.S. Virgin Islands. The transaction is expected to close in the fourth quarter of 2020

Key Rating Drivers

Improved Scale and Diversification: Fitch expects LCPR to approximately triple in size, following the closing of the acquisition. Fitch expects revenues in the USD1.2 billion-USD1.3 billion range, with EBITDA generation in the USD500 million-USD550 million range over the rating horizon. The combined entity should benefit from economies of scale, as well as enhanced product offerings across both its mobile and fixed-line businesses, which should contribute around 2/3 and 1/3 of the company's revenues, respectively. There are not significant overlaps in the product portfolio.

Stronger Market Position: The combined entity boasts leading market shares in both wireless and broadband Puerto Rico. While the merger of T-Mobile and Sprint presents a formidable mobile competitor with a similar market share, neither company has a broadband presence on the island. America Movil S.A.B. de C.V .'s Claro has a significant broadband and mobile share on the island; however, AT&T 's mobile subscriber base is weighted towards post-paid, while America Movil 's is weighted towards prepaid. Puerto Rico's mobile base comprises mostly 4G post-paid customers, which compares favorably with other markets in Latin America and the Caribbean. AT&T also has a mobile market share of 49% in the U.S. Virgin Islands.

Recovery from Hurricane: LCPR's standalone financial profile has strengthened considerably following the hurricanes with leverage declining from a maximum of over 10.0x on an LTM basis at third-quarter 2018, as the company largely restored service by YE 2018. Fitch has upgraded the LCPR's IDRs twice following the downgrade to the company after Hurricanes Irma and Maria in third-quarter 2017. Fitch expects that the combined company will maintain net leverage around 4.0x-4.5x, in line with sister companies CWC and VTR.

Linkages with Liberty Latin America (LLA): LLA's financial management strategy involves moderately high amounts of leverage across its operating subsidiaries, each ring-fenced from one another. While the credit pools are legally separate, LLA has a history of moving cash around the group for investments and acquisitions. This approach improves financial flexibility; however, it also limits the prospects for deleveraging. The high degree of cash movement throughout the group could support an eventual equalization of ratings; especially given LCPR's recovery and new scale compared with Cable & Wireless Communications Limited (CWC, BB-/Stable) and VTR Finance NV (VTR, BB-/Stable) following the completion of the merger.

Acquisition Pressures Group's Capital Structure: Net debt across the group should rise by USD1.95 billion to finance the acquisition. While Fitch does not rate LLA, the rated subsidiaries are ultimately responsible for servicing the group's consolidated debts, including the parent company's USD403 million convertible bond due 2024. While net leverage across the rated entities should remain in the 4.0x-4.5x range, consolidated LLA leverage is high for the rating category, and could result in a negative rating actions in the future.

Cash Flow Expected to Improve: Pre-merger, LCPR and AT&T generated adjusted EBITDA margins of approximately 50% and 39%, respectively, which results in a pro forma EBITDA margin of 42%. Consolidation of shared functions should drive modest efficiencies in both costs and capex, improving FCF. The company's strong market position and the limited size of the mature island markets both act as natural barriers to entry, which supports EBITDA margins around 40%. Capital intensity has moderated since network restoration, which was largely completed in second-half 2018, and should continue declining in the medium term to around 14%-16%.

Mixed Operating Environment Trends: LCPR benefits somewhat from a dollarized economy with relatively high GDP per capita and favorable systemic governance characteristics. Unfortunately, GDP for the island, along with population, is still below pre-Hurricane levels, and the overall prospects for growth remain highly uncertain. Political instability is also a negative, as is stubbornly high unemployment. The U.S. government has allocated USD950 million for network improvements in PR and the USVI, along with USD9 billion for infrastructure funds thus far. Combined with the restructuring of Puerto Rico's debt, the new funds could provide the island with an economic boost.

Derivation Summary

Following the completion of the acquisition, LCPR's credit profile should be in line with CWC and VTR's. Each is expected to maintain EBITDA net leverage above 4.0x, and each has a strong competitive position in their respective markets, which is offset by their lack of geographic diversification on an individual basis. LLA's financial management strategy of keeping net leverage above 4.0x and moving cash around the group to fund acquisitions and investments could result in the eventual equalization of ratings across the three credit pools.

Compared with Caribbean peer Digicel International Finance Limited (CCC+), LCPR has a more diversified product portfolio, which is more subscription based, and a less leveraged capital structure. Furthermore, consolidated leverage at the parent is much lower at LLA (NR) than at Digicel Group Holdings Limited (CCC).

LLA has a business profile similar to Millicom International Cellular SA 's (MIC; BB+/Stable), a holding company whose subsidiaries have leading positions in several markets. LLA's revenue base has a higher proportion of dollars and subscription revenues, while Millicom's revenues are primarily local currency denominated. Both have seen leverage increase as a result of acquisitions. However, LLA's leverage remains higher than MIC's, which Fitch expects to decline to 2.5x-3.0x over the medium term

ESG Considerations

Liberty Communications of Puerto Rico LLC: Group Structure: 4, Exposure to Environmental Impacts: 4, Financial Transparency: 4

LCPR scores a '4' on Group Structure and Financial Transparency as a result of LLA's financial management strategies. The company also scores a '4' on Exposure to Environmental Impacts, due to its presence in a hurricane-prone region.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg .

Key Assumptions

Fixed Operations

--Fixed RGUs to grow by approximately 1% overall, as growing broadband penetration offsets flat to declining Pay TV and telephone over the medium term;

--Blended Fixed ARPU in the USD38-USD40 range as increases in broadband offset decreasing Pay TV and telephone over the medium term;

--Programming and other direct costs of service to decline as a percent of revenues as Pay TV revenues decline, with SG&A and other operating expenses to grow slightly faster than inflation.

Mobile Operations:

--Postpaid RGUs to grow in the 2%-3% range, with ARPUs declining by approximately 1%-2%;

--Blended EBITDA margins of 40%-42% over the medium term, equivalent to USD500 million-USD550 million;

--Capex of around USD180 million-USD200 million, or approximately 14%-16% of revenues

Fitch projects recovery rates in the 50%-70% range, consistent with an 'RR3'. The recovery analysis assumes that LCPR would be reorganized as a going-concern in bankruptcy rather than liquidated. We have assumed a 10% administrative claim. Fitch estimates a GC EBITDA of approximately USD245 million, which is roughly equivalent to a 50% decline for the combined business. Fitch uses an EV/EBITDA multiple of 6.0, between the 5.0x historical used for LCPR and the 6.5x multiple that LLA is paying for AT&T 's assets.

RATING SENSITIVITIES

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

--A positive rating action is contingent on successful closing of the transaction, along with the prospect of deleveraging at the consolidated LLA level to below 4.5x net debt/EBITDA.

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

--An erosion of the company's business position and/or sizable cash upstream for M&A or dividends, leading to net debt/EBITDA over 5.0x could trigger a negative rating action.

--While the three credit pools are legally separate, LLA net debt/EBITDA sustained above 5.0x could result in negative rating actions at one or multiple rated entities in the group.

Best/Worst Case Rating Scenario

29 Sep 2020 14:01 ET Press Release: Fitch Affirms Liberty -2-

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579 .

Liquidity and Debt Structure

Adequate Liquidity: LCPR had $102 million in readily available cash and equivalents, and another $1.35 billion in restricted cash as of June 30th, 2020, and no short-term principal maturities. The company benefits from its long dated maturity profile, and the financial flexibility that LLA enables by moving cash between the three credit pools. The company also has access to a $125 million revolving credit facility, which further bolsters liquidity.

In fourth-quarter 2019, LCPR refinanced their existing credit facilities, replacing the $850 million first lien and $93 million second lien term loans with a new secured $1.0 billion dollar term loan due 2026. The company also issued $1.2 billion senior secured notes, to which 90m have been added. The proceeds of these notes issuances were put into escrow to fund the acquisition of AT&T 's assets in PR and USVI.

Summary of Financial Adjustments

Standard adjustments made in line with Fitch Corporate Rating Criteria.

Restricted cash was added to cash & equivalents

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

Liberty Communications of Puerto Rico LLC: Group Structure: 4, Exposure to Environmental Impacts: 4, Financial Transparency: 4

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg