Fitch Affirms Telecom Argentina's Ratings; Outlook Stable

By Fitch 

Fitch Ratings - Chicago - 02 Jul 2024: Fitch Ratings has affirmed Telecom Argentina S.A.'s ratings, including its Long-Term Foreign Currency (FC) Issuer Default Rating (IDR) at 'B-', Long-Term Local Currency (LC) IDR at 'B', and instrument ratings at 'B'/'RR3'. The Rating Outlook is Stable.

These ratings reflect Fitch's expectation that Telecom Argentina will be able to continue mitigating inflationary pressures while maintaining its strong market position. Despite the macroeconomic instability in Argentina, where the majority of its operations and assets are located, the company has historically managed to pass most inflation effects onto consumers, thereby alleviating some macroeconomic concerns.

Telecom Argentina's robust financial and operational profile is supported by its strong cash flow generation, relatively conservative capital structure, and competitive strengths in both fixed and mobile services.

KEY RATING DRIVERS

Country Ceiling Limits Foreign Currency Ratings: Telecom Argentina's Long-Term FC IDR is limited by Argentina's 'B-' Country Ceiling. Fitch assesses that any default by the company would likely stem from transfer and convertibility restrictions rather than a significant decline in its operational performance.

Strong Operator, Weak OE: Telecom Argentina is the leading integrated operator in the country, holding strong competitive positions in both fixed and mobile services. The company's robust product offerings and brand recognition bolster its ability to generate strong cash flow. Historically, Telecom Argentina has managed the volatile macroeconomic environment by adjusting service prices to counteract rising operational costs, thus maintaining solid credit metrics. However, macroeconomic risks remain, as demonstrated by the sharp devaluation of the Argentine peso in December 2023, which temporarily increased the company's leverage. Fitch anticipates appreciation of the peso in real terms in 2024, allowing leverage to revert to its long-term trend.

Price-Setting Independence: In April 2024, the Argentine government repealed a prior policy that regulated the prices of internet, mobile phone, and cable television services, granting telecom service providers the freedom to set their own tariffs. Since March 2023, Telecom Argentina has been raising prices monthly to keep pace with accelerated inflation. Fitch expects the company to continue adjusting prices as necessary to mitigate inflationary pressures, maintaining an EBITDA margin around 25% over the rating horizon.

Financial Profile Comparable to Investment-Grade Peers: Telecom Argentina's financial structure is among the strongest of Fitch-rated telecom companies in the region, characterized by a conservative capital structure and positive cash flow. Fitch projects the company's net debt/EBITDA ratio to remain between 1.8x and 2.4x over the rating horizon, aligning with stronger investment-grade operators in the region. However, fluctuations in the Argentine peso introduce volatility to the company's leverage profile. Fitch expects Telecom Argentina to refinance upcoming maturities as needed and maintain debt levels around USD 2.2 billion.

DERIVATION SUMMARY

The speculative ratings of Telecom Argentina compare with those of other Argentine issuers YPF S.A. (CCC-) and Arcor S.A.I.C. (B/Stable) that have solid business and capital structures but whose ratings are restricted by the difficulties of operating in Argentina. Arcor's ratings are higher than those of YPF and Telecom Argentina due to its operations in Brazil and the cash it holds abroad in its foreign subsidiaries. The company's business and financial profile are in line, or superior to, regional IG telecom operators including Telefonica Moviles Chile S.A. (BBB-/Stable) and Empresa Nacional de Telecomunicaciones S.A. (BBB-/Stable). Telecom Argentina has either a more conservative capital structure, or a stronger market position, or both. Ultimately, both the Foreign Currency (FC) and Local Currency (LC) IDR of Telecom Argentina will continue to be driven by the difficulties of the Argentine OE.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer Include:

--The company is able to pass on the majority of inflation to consumers each year;

--Net leverage trending near 2.0x;

--EBITDA margins around 25-26%;

--Capital intensity around 17%-18%.

RECOVERY ANALYSIS

For going-concern EBITDA, Fitch assumes that the company would be unable to pass on a significant portion of the projected inflation of Argentina, while the company's expenses would rise at inflation. This scenario implies a significant drop in EBITDA margins to 20%. Fitch uses a 4x multiple, lower than the average telecom Enterprise value/EBITDA multiple of 5x-7x, to account for a discount for Argentine assets.

Although Fitch's recovery methodology suggests a 'RR2' recovery for Telecom Argentina, the methodology also applies a standard cap of 'RR4' for instrument ratings in Argentina. Fitch applies country-specific caps to instrument ratings for a given jurisdiction, reflecting Fitch's view that average recoveries could be lower in regimes that are debtor-friendly and/or have weak enforceability, and higher in regimes that are creditor-friendly and/or have strong enforceability. The caps limit the assignment of higher Recovery Ratings for obligations of issuers that are incorporated, or whose assets or cash flows are located in less creditor-friendly jurisdictions.

However, per Fitch's Country Specific Treatment of Recovery Criteria, when an issuer actually enters a distressed or defaulted state, such as Argentina (CC), Fitch can assign a higher recovery rating for an issuer instrument if it believes that recoveries in the individual case will be consistent with a higher Recovery Rating, as is in this case. Therefore, the recovery rating for Telecom Argentina's senior unsecured notes is assessed at 'RR3'.

RATING SENSITIVITIES

That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

--Telecom Argentina's FC IDR is bound by Argentina's 'B-' Country Ceiling; therefore, an upgrade of the Argentine sovereign rating and concurrent upgrade of the Argentine Country Ceiling would result in an upgrade;

--Telecom Argentina's LC IDR is constrained by the difficult Argentine OE; therefore, a decrease in macroeconomic turmoil could result in an upgrade.

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade Telecom Argentina's FC IDR is bound by Argentina's 'B-' Country Ceiling; therefore, a downgrade of the Argentine sovereign rating and concurrent downgrade of the sovereign's Country Ceiling would result in a downgrade.

LIQUIDITY AND DEBT STRUCTURE

Sufficient Liquidity: Telecom Argentina maintains sufficient liquidity, with ARS466 billion in cash available against ARS718 billion in short-term debt as of March 2024. The company also possesses ample borrowing capacity in local capital markets. The majority of Telecom Argentina's cash and debt is denominated in U.S. dollars.

While Telecom Argentina has smaller operations outside of Argentina in Paraguay, Uruguay, Chile, and the U.S., Fitch does not view these operations as substantial enough to bypass the Argentine Country Ceiling (B-).

Telecom Argentina's refinancing risk is deemed manageable. The company's liquidity and financial flexibility are bolstered by strong cash flow, which Fitch expects to sufficiently cover capital expenditures. Telecom Argentina also has a long-standing track record of refinancing and rolling over bank debt and loans from international agencies, such as the International Finance Corporation.

Fitch anticipates that Telecom Argentina will maintain a debt level of approximately USD2.2 billion over the coming years. The company's ability to transfer inflation costs to consumers has been vital in sustaining its cash flow.

ISSUER PROFILE

Telecom Argentina S.A. is the largest integrated telecommunications services provider in Argentina, offering broadband, pay TV and fixed and mobile telecommunications services throughout the country. The company also has smaller operations in Paraguay, Uruguay, Chile, and the U.S.

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.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG CONSIDERATIONS

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.