Fitch Ratings has downgraded Philippine Long Distance Telephone Company’s (PLDT) Long-Term Local-Currency Issuer Default Rating (IDR) (LC IDR) to ‘BBB+’ from ‘A-‘. The agency has simultaneously affirmed PLDT’s Long-Term Foreign-Currency IDR (FC IDR) and its foreign-currency senior unsecured rating at ‘BBB’.
Fitch has also affirmed the National Rating at AAA(phl). The Outlook on the issuer ratings is Stable. A full list of rating actions is at the end of this Rating Action Commentary. The downgrade on the LC IDR reflects our expectation of a further deterioration in PLDT’s funds flow from operation (FFO)-adjusted net leverage to 2.5x in 2015-2017 (2014: 1.9x) due to significant capex expansion.
However, the FC IDR remained at ‘BBB’ and it continues to be capped at the Philippines’ Country Ceiling, reflecting the additional risks associated with transfer and convertibility of foreign currency.
KEY RATING DRIVERS Increased Investment: PLDT’s expansion in 3G/4G is likely to push the capex/revenue ratio to 25% in 2015-2016, from 20% in 2014. However, we expect capex to normalise to 20% of revenue after 2016.
In addition, PLDT has earmarked USD100m for digital acquisitions in 2015; of which USD20m has already been invested in internet TV service provider iflix and online payment solution company Paywhere.
Earnings Under Pressure: Fitch forecasts operating EBITDAR to weaken to about PHP77bn (2014: PHP80bn) in 2015 due to flat revenue and continued pressure on margins. Furthermore, the changing revenue mix and the build-out of the digital business are likely to erode operating EBITDAR margin to 44%-45% (2014: 46.6%).
Our forecast assumes losses in the digital business over the next three years. FCF Deficit: Fitch believes the company’s free cash flow (FCF) will stay negative in the next two years due to large capex. This is despite management plans to reduce special dividends to conserve cash flows.
Our forecasts assume dividend payment of around 80%-85% of core profits; the company’s stated dividend policy is to pay out at least 75% of its core profit. Continued Market Leadership: We expect PLDT to sustain its leading position in the Philippine telecommunications market, although Telstra Corporation Limited’s (A/Stable) impending entry with San Miguel Corporation will intensify competition over the longer term.
Large cash burn for the new entrant is likely in the initial period as it faces significant capital investment to build its network in the absence of infrastructure sharing. LIQUIDITY Strong Liquidity: PLDT’s liquidity remains solid, with cash balance of PHP37.2bn at end-June 2015 sufficient to cover its PHP16.7bn short-term obligations maturing over the next 12 months. Its debt maturities are well spread out with over 60% of total debt due after 2017.
In addition, we believe PLDT has strong access to local banks and the retail bond market, given its solid financial and leading market position in the Philippines. KEY ASSUMPTIONS Fitch’s key assumptions within the rating case for PLDT include: – Flat revenue in 2015, and to grow by low single-digit percentages thereafter – Operating EBITDAR margin of 44%-45% in 2015-2017 – Capex/revenue ratio of 25% in 2015-2016, and to decline to 20%-21% in 2017 – USD100m earmarked for new acquisitions – Dividend payout ratio of 80%-85% of core profit.
RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: – PLDT’s Long-Term Local-Currency IDR (LT LC IDR) could be upgraded if FFO-adjusted net leverage falls below 2.0x and FCF are positive on a sustained basis. – PLDT’s Long-Term Foreign-Currency IDR (LT FC IDR) could be upgraded if there is a positive rating action on the Philippines’ Country Ceiling. Negative: Future developments that may, individually or collectively, lead to negative rating action include: – PLDT’s LT LC IDR could be lowered if FFO-adjusted net leverage rises above 3.0x on a sustained basis.
– A negative rating action on the Philippines’ Country Ceiling will result in a corresponding action on PLDT’s LT FC IDR. FULL LIST OF RATING ACTIONS Philippine Long Distance Telephone Company Long-Term Foreign-Currency IDR affirmed at ‘BBB’; Outlook Stable Long-Term Local-Currency IDR downgraded to ‘BBB+’ from ‘A-‘; Outlook Stable Foreign-currency senior unsecured rating affirmed at ‘BBB’ Long-Term National Rating affirmed at ‘AAA(phl)’; Outlook Stable Contact: Primary Analyst Janice Chong Director +65 6796 7241 Fitch Ratings Singapore Pte. Ltd. 6 Temasek Boulevard #35-03/04/05 Suntec Tower Four Singapore 038986 Secondary Analyst Nitin Soni Director +65 6796 7235 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: firstname.lastname@example.org. Additional information is available on www.fitchratings.com. Note to editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(phl)’ for National ratings in the Philippines. Specific letter grades are not therefore internationally comparable. Applicable Criteria Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage