Corporates Telecommunications Colombia
Ratings
UNE EPM Telecomunicaciones Last Rating Rating Type Rating Outlook Action S.A. Long- BBB Stable Affirmed Term Sept. Local 16,2020 Currency IDR
Long- BBB Negative Affirmed Term Sept.
IDR 16,2020 UNE EPM Telecomunicaciones S.A.’s (TIGO UNE) ‘BBB’ Issuer Default Ratings reflect the National AAA(col) Stable Affirmed company’s fully integrated operations and solid network competitiveness, which support its Long- Sept. 16, strong market position in the Colombian telecommunication sector. The company’s cash flow Term 2020 from operations (CFFO) is well-diversified among fixed, mobile and B2B services. Rating
TIGO UNE’s investments for network upgrades and expansion is expected to support continued Click here for full list of ratings subscriber growth and help maintain a stable credit profile in the short to medium term, as reflected by the Stable Outlook on the Local Currency IDR. The Negative Outlook on TIGO
UNE’s Foreign-Currency IDR reflects the Negative Outlook on Colombia’s ‘BBB–’ sovereign ratings, as well as the ‘BBB’ Country Ceiling for Colombia.
Key Rating Drivers Supportive Shareholder Agreement: A shareholder agreement between Millicom International Cellular S.A. (BB+/Stable) and Empresas Publicas de Medellin E.S.P. (EPM; BBB–/ Rating Watch Negative) protects the company against the desire by either of its shareholders for higher dividends or a more leveraged capital structure.
The agreement supports TIGO UNE’s capital structure as it requires a super majority for measures such as capex in excess of USD80 million, debt issuances that cause the company ’s net debt/EBITDA to be greater than 2.5x, or dividends in excess of 50% of net income.
Strong Market Position: TIGO UNE is the third-largest telecom operator in Colombia by revenue, behind Claro Colombia, a subsidiary of America Movil S.A.B. de C.V. (A–/Stable), and Colombia Telecomunicaciones S.A. E.S.P. (BBB–/Stable). The company has a diversified service Applicable Criteria portfolio with a nationwide operational footprint and a high-quality competitive hybrid fiber Corporate Rating Criteria (May 2020) coaxial network for its fixed business and 3G and 4G mobile networks. National Scale Rating Criteria (June 2020) TIGO UNE is the country’s second-largest provider of fixed internet services and the third- Parent and Subsidiary Linkage Rating Criteria largest supplier of mobile voice, with market shares of 24.4% and 17.6%, respectively, as of (August 2020) YE 2019, according to the Ministerio de Tecnologias de la Informacion y las Comunicaciones. TIGO UNE also had a 19.7% share of the TV market. The company is expected to maintain a Related Research strong position in the fixed business, and modestly increase its mobile subscriber base on the Latin American Telecommunications: Peer back of a more competitive mobile network. Review 2020 (Robust Sector, but Some Issuers Are More Robust than Others) Pandemic’s Impact on Telecoms: Fitch does not expect the same level of disruption from the (October 2020) coronavirus pandemic to telecom companies as has occurred in other sectors. Increased screen Pandemic Progress Check: LatAm Telcom and voice time, across fixed and mobile platforms, will likely be offset by declining disposable (October 2020) income, pressuring revenue and EBITDA. A prolonged recession or significant government What Investors Want to Know: Latin American Telecommunications (Headroom intervention into telecom operators’ price-setting would be negative. During the Coronavirus Crisis) (April 2020)
The Colombian mobile market is mostly prepaid, with approximately 80% of subscribers opting for that plan. Prepaid customers are more price-sensitive than those that opt for postpaid plans. Positively, low broadband penetration presents a growth opportunity; TIGO UNE holds a strong Analysts
market position in broadband with a 24.4% share, behind only Claro Colombia’s 38.0% share. Danny Patel +1 312 368 5461 Stable Performance: Fitch expects TIGO UNE’s revenue to be stable over the rating horizon, [email protected] despite competitive pressures in the Colombian telecom market and a short-term downturn from pandemic-related closures. As part of its strategy to increase its competitiveness in the Luis Idarraga Alvarez +57 1 484 6770 mobile business and to drive subscriber growth, the company introduced competitive mobile- [email protected] data-focused commercial offerings in 2018, and acquired new spectrum in 2019.
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In the fixed household business, the company is expected to maintain its competitive position, driven by continued growth in revenue-generating users. TIGO UNE’s fixed household and mobile businesses each represent about 36% of total revenue. After an expected downturn in 2020, Fitch forecasts low-single-digit revenue growth and stable Fitch-adjusted EBITDA margins averaging 27% from 2021 onward. Solid Financial Profile: TIGO UNE has maintained a solid financial profile, highlighted by stable leverage and consistent cash flows. Fitch expects leverage, measured as total debt/ Fitch- adjusted EBITDA, to remain flat at approximately 2.1x over the medium term. Leverage has trended down from 2.8x in 2017, mainly due to reduced debt. Fitch’s view is based on an expectation that the company will maintain approximately COP2.7 trillion in debt and generate average EBITDA of approximately COP1.3 trillion in 2020–2022. Fitch expects the company to post neutral to negative FCF over the medium term, as it continues to invest in fixed and mobile networks and coverage in a competitive business environment. Capital intensity is expected to average 27% of Fitch’s projected revenues over the rating horizon, which is higher than the average capex intensity of 18% in 2015–2019.
Ownership Structure: TIGO UNE benefits from being a subsidiary of Millicom and EPM. EPM is the economic parent of TIGO UNE, holding 50% plus one share of the consolidated entity, and has influence on operational and financial decisions. Millicom holds 50% minus one share in its economic stake, but holds a majority of the voting shares and has a controlling stake in the company.
Millicom is a diversified telecom company with operations in 10 countries across Latin America and Africa. Millicom’s ratings reflect its geographic diversification, strong brand recognition and network quality, and leading market positions. EPM is a leading electricity generator in Colombia and has a diversified portfolio of utility businesses that include electric generation, transmission and distribution, water and sewage services, natural gas distribution, and garbage collection and disposal services. Financial Summary (COP Mil., as of Dec. 31) 2017 2018 2019 2020F 2021F 2022F Gross Revenue 5,060,311 4,810,880 4,927,143 4,812,296 4,921,331 5,049,472 Operating EBITDA Margin (%) 26.7 29.7 25.6 25.3 26.0 26.5 FFO Fixed-Charge Coverage (x) 2.8 3.0 5.9 7.6 8.2 8.3 Total Debt with Equity Credit/Operating EBITDA (x) 2.5 2.3 2.1 2.2 2.1 2.0 Total Net Debt with Equity Credit/Operating EBITDA (x) 2.1 1.9 1.6 2.1 2.0 2.0
F – Forecast. Source: Fitch Ratings, Fitch Solutions.
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Rating Derivation Relative to Peers TIGO UNE’s business is similar to that of direct competitor Colombia Telecomunicaciones, with similar revenue shares of the Colombian market. TIGO UNE has a longer history of maintaining lower leverage, which supports a one notch higher rating. 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 mostly prepaid, at approximately 80%.
TIGO UNE’s financial performance and leverage profile is expected to be more stable than Chile’s Empresa Nacional de Telecomunicaciones S.A. (ENTEL; BBB–/Negative). ENTEL ’s ratings reflect the intense competitive landscape amid increasing mobile industry maturity in Chile, the company’s aggressive growth strategy in Peru and increased leverage. Similarly, TIGO UNE’s overall credit profile is much stronger than ‘BB’ category domestic telecom peers such as Empresa de Telecomunicaciones de Bogota, S.A., E.S.P. (ETB; BB+/Stable). Fitch estimates ETB will find it difficult to improve EBITDA performance, given its low network penetration and rapidly contracting cash flows.
TIGO UNE’s ‘BBB’ ratings are one notch 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. TIGO UNE’s ratings incorporate a linkage with Millicom, which holds the controlling majority of shares in the company. Despite the absence of a ring-fencing mechanism to limit TIGO UNE’s cash upstream to its controlling shareholder, Fitch does not expect this relationship to impair TIGO UNE’s ability to execute its capex strategy while maintaining a credit profile in line with the rating. TIGO UNE is one of Millicom’s most important EBITDA contributors, highlighting its financial importance to the parent’s credit profile.
Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade • Stabilization of the Colombian sovereign rating would lead to a Stable Outlook for TIGO UNE’s Foreign Currency IDR;
• Total debt/EBITDA below 2.0x or net debt/EBITDA below 1.5x on a sustained basis due to a strengthening of the company’s competitive position or FCF being used to pay down debt. Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade • Deterioration in market position due to greater than expected competition;
• Persistently negative FCF due to higher than expected shareholder distributions or capex;
• Total debt/EBITDA increasing to over 3.0x, or net debt/EBITDA above 2.5x on a sustained basis; • A downgrade to Colombia’s ‘BBB’ Country Ceiling would likely lead to a downgrade of TIGO UNE’s Foreign Currency IDR. Liquidity and Debt Structure Strong Liquidity Profile: TIGO UNE’s stable CFFO and manageable debt amortization profile support its strong liquidity profile. The company had no short-term debt as of June 30, 2020, compared with a readily available cash balance of COP462 billion and expected annual average CFFO of COP1.2 trillion over the ratings horizon. The next relevant debt maturity is COP150 billion, due in 2023 from a local bond issuance. Fitch expects liquidity to remain strong over the ratings horizon.
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ESG Considerations The highest level of ESG credit relevance, if present, 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 to 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. Liquidity and Debt Maturities with No Refinancing
Liquidity Analysis (COP Mil.) 12/31/18 12/31/19 Total Cash and Cash Equivalents 548,492 673,183 Short-Term Investments — — Less: Not Readily Available Cash and Cash Equivalents 475 2,034 Fitch-Defined Readily Available Cash and Cash Equivalents 548,017 671,149 Availability Under Committed Lines of Credit 0 0 Total Liquidity 548,017 671,149
LTM EBITDA After Associates and Minorities 1,430,277 1,261,072 LTM FCF 99,044 52,390
Source: Fitch Ratings, Fitch Solutions, UNE EPM Telecomunicaciones S.A..
Scheduled Debt Maturities (COP Mil.) 12/31/19 2020 150,000 2021 0 2022 0 2023 180,000 2024 1,203,142 Thereafter 1,173,487 Total 2,706,629
Source: Fitch Ratings, Fitch Solutions, UNE EPM Telecomunicaciones S.A..
Key Assumptions Fitch’s Key Assumptions Within Our Rating Case for the Issuer • A 2.3% revenue decline in 2020; low-single-digit revenue growth in 2021–2022; • Fitch’s adjusted EBITDA averages COP1.3 trillion over the ratings horizon; • Fitch’s total leverage metric is flat at 2.1x in 2020–2022;
• Average capex intensity of 27% during 2020–2022 due to spectrum spending and coverage obligations; • No material dividend payments in 2020–2021.
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Financial Data
Historical Forecast (COP Mil., as of Dec, 31) 2017 2018 2019 2020 2021 2022 Summary Income Statement Gross Revenue 5,060,311 4,810,880 4,927,143 4,812,296 4,921,331 5,049,472 Revenue Growth (%) (1.7) (4.9) 2.4 (2.3) 2.3 2.6 Operating EBITDA (Before Income from Associates) 1,349,654 1,430,277 1,261,072 1,217,697 1,278,982 1,339,298 Operating EBITDA Margin (%) 26.7 29.7 25.6 25.3 26.0 26.5 Operating EBITDAR 1,524,297 1,609,652 1,261,072 1,217,697 1,278,982 1,339,298 Operating EBITDAR Margin (%) 30.1 33.5 25.6 25.3 26.0 26.5 Operating EBIT 142,262 307,562 242,929 (44,583) 23,598 82,406 Operating EBIT Margin (%) 2.8 6.4 4.9 (0.9) 0.5 1.6 Gross Interest Expense (385,045) (371,445) (234,255) (155,573) (155,573) (155,573) Pretax Income (Including Associate Income/Loss) (87,805) (78,871) 61,694 (173,548) (106,166) (48,132) Summary Balance Sheet Readily Available Cash and Equivalents 561,371 548,017 671,149 176,363 156,082 62,250 Total Debt with Equity Credit 3,373,450 3,300,407 2,706,629 2,706,629 2,706,629 2,706,629 Total Adjusted Debt with Equity Credit 4,246,665 4,197,282 2,706,629 2,706,629 2,706,629 2,706,629 Net Debt 2,812,079 2,752,390 2,035,480 2,530,266 2,550,547 2,644,379 Summary Cash Flow Statement Operating EBITDA 1,349,654 1,430,277 1,261,072 1,217,697 1,278,982 1,339,298 Cash Interest Paid (367,571) (350,275) (189,971) (155,573) (155,573) (155,573) Cash Tax (56,080) (8,950) (25,819) (29,561) (6,979) (42,414) Dividends Received Less Dividends Paid to Minorities (Inflow/(Out)flow) 0 0 0 0 0 0 Other Items Before FFO 31,297 13,004 (119,170) 0 0 0 Funds Flow from Operations 988,483 1,120,887 953,542 1,059,170 1,142,239 1,166,346 FFO Margin (%) 19.5 23.3 19.4 22.0 23.2 23.1 Change in Working Capital (6,739) (117,891) 48,264 (55,285) 67,938 2,370 Cash Flow from Operations (Fitch Defined) 981,744 1,002,996 1,001,806 1,003,885 1,210,178 1,168,716 Total Non-Operating/Nonrecurring Cash Flow 0 0 0 Capex (875,826) (898,953) (877,435) Capital Intensity (Capex/Revenue) (%) 17.3 18.7 17.8 Common Dividends (3) (4,999) (71,981) FCF 105,915 99,044 52,390 Net Acquisitions and Divestitures 264,319 99,818 19,874 Other Investing and Financing Cash Flow Items (1,796) (6,533) 159,787 1,329 (126) (180) Net Debt Proceeds (138,188) (205,683) (108,919) 0 0 0 Net Equity Proceeds 0 0 0 0 0 0 Total Change in Cash 230,250 (13,354) 123,132 (494,786) (20,281) (93,833) Leverage Ratios (x) Total Net Debt with Equity Credit/Operating EBITDA 2.1 1.9 1.6 2.1 2.0 2.0 Total Adjusted Debt/Operating EBITDAR 2.8 2.6 2.1 2.2 2.1 2.0 Total Adjusted Net Debt/Operating EBITDAR 2.4 2.3 1.6 2.1 2.0 2.0 Total Debt with Equity Credit/Operating EBITDA 2.5 2.3 2.1 2.2 2.1 2.0 FFO Adjusted Leverage 2.8 2.6 2.4 2.3 2.1 2.1 FFO Adjusted Net Leverage 2.5 2.3 1.8 2.1 2.0 2.0 FFO Leverage 2.5 2.3 2.4 2.3 2.1 2.1 FFO Net Leverage 2.1 1.9 1.8 2.1 2.0 2.0
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Calculations for Forecast Publication Capex, Dividends, Acquisitions and Other Items Before FCF (611,510) (804,134) (929,542) (1,500,000) (1,230,333) (1,262,368) FCF After Acquisitions and Divestitures 370,234 198,862 72,264 (496,115) (20,155) (93,652) FCF Margin (After Net Acquisitions) (%) 7.3 4.1 1.5 (10.3) (0.4) (1.9) Coverage Ratios (x) FFO Interest Coverage 3.6 4.1 5.9 7.6 8.2 8.3 FFO Fixed Charge Coverage 2.8 3.0 5.9 7.6 8.2 8.3 Operating EBITDAR/Interest Paid + Rents 2.8 3.0 6.6 7.8 8.2 8.6 Operating EBITDA/Interest Paid 3.7 4.1 6.6 7.8 8.2 8.6 Additional Metrics (%) CFO-Capex/Total Debt with Equity Credit 3.1 3.2 4.6 (18.3) (0.7) (3.5) CFO-Capex/Total Net Debt with Equity Credit 3.8 3.8 6.1 (19.6) (0.8) (3.5) CFO – Cash flow from operations. Source: Fitch Ratings, Fitch Solutions.
How to Interpret the Forecast Presented
The forecast presented is based on Fitch Ratings’ internally produced, conservative rating case forecast. It does not represent the forecast of the rated issuer. The forecast set out above is only one component used by Fitch Ratings to assign a rating or determine a rating outlook, and the information in the forecast reflects material but not exhaustive elements of Fitch Ratings’ rating assumptions for the issuer’s financial performance. As such, it cannot be used to establish a rating, and it should not be relied on for that purpose. Fitch Ratings’ forecasts are constructed using a proprietary internal forecasting tool, which employs Fitch Ratings’ own assumptions on operating and financial performance that may not reflect the assumptions that you would make. Fitch Ratings’ own definitions of financial terms such as EBITDA, debt or free cash flow may differ from your own such definitions. Fitch Ratings may be granted access, from time to time, to confidential information on certain elements of the issuer’s forward planning. Certain elements of such information may be omitted from this forecast, even where they are included in Fitch Ratings’ own internal deliberations, where Fitch Ratings, at its sole discretion, considers the data may be potentially sensitive in a commercial, legal or regulatory context. The forecast (as with the entirety of this report) is produced strictly subject to the disclaimers set out at the end of this report. Fitch Ratings may update the forecast in future reports but assumes no responsibility to do so. Original financial statement data for historical periods is processed by Fitch Solutions on behalf of Fitch Ratings. Key financial adjustments and all financial forecasts credited to Fitch Ratings are generated by rating agency staff.
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Ratings Navigator
ESG Relevance: Corporates Ratings Navigator UNE EPM Telecomunicaciones Telecommunications Business Profile Financial Profile Factor Sector Risk Profile Operating Environment Management and Technology and Issuer Default Rating Levels Competitive Position Diversification Regulatory Environment Profitability Financial Structure Financial Flexibility Corporate Governance Infrastructure
aaa AAA Negative
aa+ AA+ Negative
aa AA Negative
aa- AA- Negative
a+ A+ Negative
a A Negative
a- A- Negative
bbb+ BBB+ Negative
bbb BBB Negative
bbb- BBB- Negative
bb+ BB+ Negative
bb BB Negative
bb- BB- Negative
b+ B+ Negative
b B Negative
b- B- Negative
ccc+ CCC+ Negative
ccc CCC Negative
ccc- CCC- Negative
cc CC Negative
c C Negative
d or rd D or RD Negative
Bar Chart Legend: Vertical Bars = Range of Rating Factor Bar Arrows = Rating Factor Outlook Bar Colours = Relative Importance Positive ◼ Higher Importance Negative ◼ Average Importance Evolving ◼ Lower Importance Stable
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Corporates Ratings Navigator UNE EPM Telecomunicaciones Telecommunications
Operating Environment Management and Corporate Governance Average combination of countries w here economic value is created and w here bbb Economic Environment bbb a- Management Strategy bbb Strategy may include opportunistic elements but soundly implemented. assets are located. Strong combination of issuer specific funding characteristics and of the strength of Good CG track record but effectiveness/independence of board less obvious. No evidence of bbb- Financial Access a bbb+ Governance Structure bbb the relevant local financial market. abuse of pow er even w ith ow nership concentration. Systemic governance (eg rule of law , corruption; government effectiveness) of the Some group complexity leading to somew hat less transparent accounting statements. No Systemic Governance bb bbb Group Structure bbb issuer’s country of incorporation consistent w ith ‘bb’. significant related-party transactions. Good quality reporting w ithout significant failing. Consistent w ith the average of listed b- bbb- Financial Transparency bbb companies in major exchanges.
ccc+ bb+
Competitive Position Diversification
bbb+ Market Position bbb Strong and sustainable market share in primary markets (>20%). bbb+ Service Platform Diversification bbb Operates several service platforms in primary markets but one is dominant.
Primary markets characterized by medium competitive intensity and/or moderate bbb Competition bbb bbb Geographic Diversification bb Limited geographic diversification. barriers to entry.
bbb- Scale - EBITDAR b <$500 million bbb-
bb+ bb+
bb bb
Technology and Infrastructure Regulatory Environment
bbb+ Ownership of Network bbb Ow ns its most important infrastructure but may lease some. a- Regulatory Risk bbb Moderate.
Solid netw ork coverage and capacity, using some up-to-date technology, w ith bbb Network and Service Quality bbb bbb+ average service quality.
bbb- bbb
bb+ bbb-
bb bb+
Profitability Financial Structure
a- Volatility of Cash Flow bbb Volatility and visibility of cash flow in line w ith industry average. a- FFO Leverage a 2.0x
bbb+ EBITDAR Margin bbb 30% bbb+ FFO Net Leverage a 1.8x (CFO-Capex)/Total Debt With Equity bbb FFO Margin bbb 24% bbb bb 7.5% Credit Total Debt With Equity Credit/Op. bbb- bbb- bbb 2.8x EBITDA bb+ bb+
Financial Flexibility Credit-Relevant ESG Derivation Overall ESG
bbb+ Financial Discipline bbb Financial policies less conservative than peers but generally applied consistently. UNE EPM Telecomunicaciones has 8 ESG potential rating drivers key 0 issues 5 driver One year liquidity ratio above 1.25x. Well-spread maturity schedule of debt but funding bbb Liquidity bbb Energy and fuel use in networks and data centers may be less diversified. driver 0 issues 4 bbb- FFO Interest Coverage bbb 6.0x Networks exposed to extreme weather events (e.g. hurricanes) bb+ FX Exposure bb FX exposure on profitability and/or debt/cash flow match. Some hedging in place. Data security; service disruptions potential 8 issues 3 driver bb Impact of labor negotiations and employee (dis)satisfaction 1 issues 2 Governance is minimally relevant to the rating and is not currently a driver. not a rating How to Read This Page: The left column shows the three-notch band assessment for the overall Factor, illustrated by a bar. The driver right column breaks down the Factor into Sub-Factors, with a description appropriate for each Sub-Factor and its corresponding 5 issues 1 category. For further details on Credit-Relevant ESG scoring, see page 3.
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Corporates Ratings Navigator UNE EPM Telecomunicaciones Telecommunications
Credit-Relevant ESG Derivation Overall ESG Scale UNE EPM Telecomunicaciones has 8 ESG potential rating drivers key driver 0 issues 5 UNE EPM Telecomunicaciones has exposure to energy productivity risk but this has very low impact on the rating. driver 0 issues 4 UNE EPM Telecomunicaciones has exposure to extreme weather events but this has very low impact on the rating. UNE EPM Telecomunicaciones has exposure to customer accountability risk but this has very low impact on the rating. potential driver 8 issues 3 UNE EPM Telecomunicaciones has exposure to labor relations & practices risk but this has very low impact on the rating. 1 issues 2 Governance is minimally relevant to the rating and is not currently a driver. not a rating driver 5 issues 1
Environmental (E) General Issues E Score Sector-Specific Issues Reference E Scale How to Read This Page GHG Emissions & Air Quality 1 n.a. n.a. 5 ESG scores range from 1 to 5 based on a 15-level color gradation. Red (5) is most relevant and green (1) is least relevant.
Energy Management 3 Energy and fuel use in networks and data centers Profitability 4 The Environmental (E), Social (S) and Governance (G) tables break out the individual components of the scale. The right-hand box shows the aggregate E, S, or G score. General Issues are relevant across all markets with Sector- Water & Wastewater Management 1 n.a. n.a. 3 Specific Issues unique to a particular industry group. Scores are assigned to each sector-specific issue. These scores signify the credit-relevance of the Waste & Hazardous Materials 1 n.a. n.a. 2 sector-specific issues to the issuing entity's overall credit rating. The Reference Management; Ecological Impacts box highlights the factor(s) within which the corresponding ESG issues are captured in Fitch's credit analysis. Exposure to Environmental Impacts 3 Networks exposed to extreme weather events (e.g. hurricanes) Profitability 1 The Credit-Relevant ESG Derivation table shows the overall ESG score. This score signifies the credit relevance of combined E, S and G issues to the Social (S) entity's credit rating. The three columns to the left of the overall ESG score summarize the issuing entity's sub-component ESG scores. The box on the far General Issues S Score Sector-Specific Issues Reference S Scale left identifies the some of the main ESG issues that are drivers or potential Human Rights, Community Relations, drivers of the issuing entity's credit rating (corresponding with scores of 3, 4 or 5) 1 n.a. n.a. 5 Access & Affordability and provides a brief explanation for the score.
Customer Welfare - Fair Messaging, 3 Data security; service disruptions Competitive Position; Profitability 4 Classification of ESG issues has been developed from Fitch's sector ratings Privacy & Data Security criteria. The General Issues and Sector-Specific Issues draw on the classification standards published by the United Nations Priniciples for Labor Relations & Practices 3 Impact of labor negotiations and employee (dis)satisfaction Competitive Position; Profitability 3 Responsible Investing (PRI) and the Sustainability Accounting Standards Board(SASB).
Employee Wellbeing 1 n.a. n.a. 2
Diversification; Technology and Infrastructure; Exposure to Social Impacts 2 Social attitudes toward network infrastructure 1 Profitability
Governance (G) CREDIT-RELEVANT ESG SCALE General Issues G Score Sector-Specific Issues Reference G Scale How relevant are E, S and G issues to the overall credit rating? Highly relevant, a key rating driver that has a significant impact on the rating Management Strategy 3 Strategy development and implementation Management and Corporate Governance 5 5 on an individual basis. Equivalent to "higher" relative importance w ithin Navigator. Relevant to rating, not a key rating driver but has an impact on the rating in Governance Structure 3 Board independence and effectiveness; ownership concentration Management and Corporate Governance 4 4 combination w ith other factors. Equivalent to "moderate" relative importance w ithin Navigator. Minimally relevant to rating, either very low impact or actively managed in a Group Structure 3 Complexity, transparency and related-party transactions Management and Corporate Governance 3 3 w ay that results in no impact on the entity rating. Equivalent to "low er" relative importance w ithin Navigator.
Financial Transparency 3 Quality and timing of financial disclosure Management and Corporate Governance 2 2 Irrelevant to the entity rating but relevant to the sector.
1 1 Irrelevant to the entity rating and irrelevant to the sector.
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Simplified Group Structure Diagram
Organizational Structure — UNE EPM Telecomunicaciones S.A. (USD Mil., as of Dec. 31, 2019)
Millicom International Cellular, S.A. Empresas Publicas de Medellin E.S.P. (EPM) IDR — BB+/Stable IDR — BBB–/Rating Watch Negative Revenue 6,345 Revenue 5,596 EBITDA 2,489 EBITDA 1,875 Cash 1,393 Cash 765 Total Debt 8,631 Total Debt 6,271
Total Debt/EBITDA (x) 3.8 Total Debt/EBITDA (x) 3.4 Net Debt/EBITDA (x) 3.2 Net Debt/EBITDA (x) 3.0
50% – 1% 50% + 1%
UNE EPM Telecomunicaciones S.A. IDR — BBB/Negative Revenue 1,502 EBITDA 385 Cash 204 Total Debt 822
Total Debt/EBITDA (x) 2.1 Net Debt/EBITDA (x) 1.6
99.99% 99.95% 100.00%
Colombia Movil S.A. (Tigo) Edatel S.A. E.S.P. Orbitel Servicios Internacionales S.A. IDR — N.R. IDR — N.R. and Cinco Telecom Corporation (Colombia) (Colombia) IDR — N.R. Assets 946 Assets 166 (U.S. and Colombia) Liabilities 854 Liabilities 75 Assets 19 Net Income 8 Net Income 6 Liabilities 8 Net Income 1
IDR – Issuer Default Rating. NR – Not rated. Source: Fitch Ratings, Fitch Solutions, UNE EPM Telecomunicaciones S.A.
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Corporates Telecommunications Colombia
Peer Financial Summary
Total Net Debt Total Debt with Equity with Equity Issuer Financial Gross Operating FFO Fixed Credit/ Credit/ Default Statement Revenue EBITDAR Charge Operating Operating Company Rating Date (USD Mil.) Margin (%) Coverage (x) EBITDA (x) EBITDA (x) UNE EPM Telecomunicaciones S.A. BBB BBB 2019 1,501 25.6 5.9 1.6 2.1 BBB 2018 1,627 33.5 3.0 1.9 2.3 BBB 2017 1,714 30.1 2.8 2.1 2.5 Colombia Telecomunicaciones S.A. BBB– E.S.P. BBB– 2019 1,572 26.7 2.0 2.4 2.7 BB+ 2018 1,730 37.4 2.4 2.4 2.4 BB 2017 1,647 35.9 1.9 2.7 2.9 Telefonica del Peru, S.A.A. (TDP) BBB BBB 2019 2,364 14.6 4.7 2.1 3.0 — 2018 2,468 20.4 2.7 1.6 1.7 BBB+ 2017 2,591 23.9 6.6 0.8 1.1 Empresa Nacional de BBB– Telecomunicaciones S.A. (ENTEL) BBB– 2019 2,834 24.1 5.4 2.5 3.8 BBB– 2018 3,001 23.9 5.2 3.8 4.0 BBB 2017 3,014 24.1 5.2 3.3 3.6 Telefonica Moviles Chile S.A. BBB+ BBB+ 2019 2,182 27.6 12.7 1.1 1.7 BBB+ 2018 2,455 27.7 9.2 1.2 1.8 BBB+ 2017 2,483 27.4 10.9 1.1 1.6 Millicom International Cellular S.A. BB+ BB+ 2019 6,345 39.2 3.5 3.2 3.8 BB+ 2018 6,011 37.5 3.7 2.6 3.0 BB+ 2017 6,024 37.0 3.5 2.1 2.6 Cable Onda, S.A. BBB– BBB– 2019 472 44.4 12.4 4.1 4.4 — 2018 392 29.0 8.5 2.2 2.3 — 2017 374 42.8 12.3 1.4 1.4 America Movil S.A.B. de C.V. A– A– 2019 52,306 28.0 7.7 2.0 2.2 A– 2018 54,005 29.2 6.9 2.0 2.1 A– 2017 54,158 27.9 6.0 2.3 2.4 Empresa de Telecomunicaciones de BB+ Bogota, S.A., E.S.P.(ETB) BB+ 2019 465 38.9 4.0 (0.2) 0.8 BB+ 2018 477 40.5 3.8 0.1 1.2 BB+ 2017 494 36.9 2.6 0.6 1.2
Source: Fitch Ratings, Fitch Solutions.
UNE EPM Telecomunicaciones S.A. Rating Report │ November 17, 2020 fitchratings.com 11
Corporates Telecommunications Colombia
Fitch Adjusted Financials Sum of Other (COP Mil., as of Dec. 31, 2019) Notes and Formulas Reported Values Adjustments Adjustments Adjusted Values Income Statement Summary Revenue 4,927,143 4,927,143 Operating EBITDAR 1,626,135 (365,063) (365,063) 1,261,072 Operating EBITDAR After Associates and Minorities (a) 1,626,135 (365,063) (365,063) 1,261,072 Operating Lease Expense (b) 0 0 Operating EBITDA (c) 1,626,135 (365,063) (365,063) 1,261,072 Operating EBITDA After Associates and Minorities (d) = (a-b) 1,626,135 (365,063) (365,063) 1,261,072 Operating EBIT (e) 442,544 (199,615) (199,615) 242,929 Debt and Cash Summary Total Debt with Equity Credit (f) 2,706,629 2,706,629 Lease-Equivalent Debt (g) 0 0 Other Off-Balance-Sheet Debt (h) 0 0 Total Adjusted Debt with Equity Credit (i) = (f+g+h) 2,706,629 2,706,629 Readily Available Cash and Equivalents (j) 671,149 671,149 Not Readily Available Cash and Equivalents 2,034 2,034 Cash Flow Summary Operating EBITDA After Associates and Minorities (d) = (a-b) 1,626,135 (365,063) (365,063) 1,261,072 Preferred Dividends (Paid) (k) 0 0 Interest Received (l) 27,430 27,430 Interest (Paid) (m) (389,586) 199,615 199,615 (189,971) Cash Tax (Paid) (25,819) (25,819) Other Items Before FFO (119,170) (119,170) Funds from Operations (FFO) (n) 1,118,990 (165,448) (165,448) 953,542 Change in Working Capital (Fitch-Defined) 48,264 48,264 Cash Flow from Operations (CFO) (o) 1,167,254 (165,448) (165,448) 1,001,806 Non-Operating/Nonrecurring Cash Flow 0 0 Capital (Expenditures) (p) (877,435) (877,435) Common Dividends (Paid) (71,981) (71,981) Free Cash Flow (FCF) 217,838 (165,448) (165,448) 52,390 Gross Leverage (x) Total Adjusted Debt/Operating EBITDARa (i/a) 1.7 2.1 FFO Adjusted Leverage (i/(n-m-l-k+b)) 1.8 2.4 FFO Leverage (i-g)/(n-m-l-k) 1.8 2.4 Total Debt with Equity Credit/Operating EBITDAa (i-g)/d 1.7 2.1 (CFO-Capex)/Total Debt with Equity Credit (%) (o+p)/(i-g) 10.7 4.6 Net Leverage (x) Total Adjusted Net Debt/Operating EBITDARa (i-j)/a 1.3 1.6 FFO Adjusted Net Leverage (i-j)/(n-m-l-k+b) 1.4 1.8 FFO Net Leverage (i-g-j)/(n-m-l-k) 1.4 1.8 Total Net Debt with Equity Credit/Operating EBITDA a (i-g-j)/d 1.3 1.6 (CFO-Capex)/Total Net Debt with Equity Credit (%) (o+p)/(i-g-j) 14.2 6.1 Coverage (x) Operating EBITDA/(Interest Paid + Lease Expense)a a/(-m+b) 4.2 6.6 Operating EBITDA/Interest Paida d/(-m) 4.2 6.6 FFO Fixed-Charge Coverage (n-l-m-k+b)/(-m-k+b) 3.8 5.9 FFO Interest Coverage (n-l-m-k)/(-m-k) 3.8 5.9 aEBITDA/R after dividends to associates and minorities. Source: Fitch Ratings, Fitch Solutions, UNE EPM Telecomunicaciones S.A.
UNE EPM Telecomunicaciones S.A. Rating Report │ November 17, 2020 fitchratings.com 12
Corporates Telecommunications Colombia
FX Screener TIGO UNE’s U.S. dollar-denominated capex is close to 66% of total capex, while U.S. dollar- denominated operating expenditures are 19% of the total. The company implements a derivative strategy to cover 40%–50% of its U.S. dollar-denominated operating expenditures such as programming costs, handsets, TV content and licenses, and capex, such as 4G and customer-premises equipment. For the remaining capex consideration, the strategy is to negotiate with suppliers ahead of time to lock in an exchange rate deemed appropriate or to build up U.S. dollar reserves with which to finance capex.
A 20% depreciation of the Colombian peso would result in a 7% EBITDA reduction, given that approximately 19% of its cost structure is in U.S. dollars, while its revenues are almost 100% denominated in Colombian pesos. As a result, under this stress scenario, gross leverage would deteriorate by approximately 0.2x. Fitch FX Screener (UNE EPM Telecomunicaciones S.A. — BBB/Negative, Dec-19, COPm) Reported currency (ST) Reported currency (LT) Foreign currency (ST) Foreign currency (LT) 100% 49,271 67,115 622,669 766,989 80% 699,874 0 0 60% 4,877,872 604,034 40% 2,654,536 2,223,336 1,789,640 1,335,606 20%
0% 150,000 0 -573,398 -20%
-40% Revenue* Costs* EBITDA Total debt* Total cash* Net debt* * Post hedge, absolute figures displayed are Fitch’s analytical estimates, based on publicly available information Source: Fitch Ratings
Fitch FX Screener - Foreign to Reported Currency Stress Test - Absolute Variation (UNE EPM Telecomunicaciones S.A. — BBB/Negative, Dec-19)
(x) EBITDA Interest Cover* (LHS) EBITDA Gross Leverage* (RHS) (x)
6 2.0 1.8 5 1.6 4 1.4 1.2 3 1.0 0.8 2 0.6 1 0.4 0.2 0 0.0 20% 16% 12% 8% 4% 0% -4% -8% -12% -16% -20% *EBITDA after Dividends to Associates and Minorities Source: Fitch Ratings
UNE EPM Telecomunicaciones S.A. Rating Report │ November 17, 2020 fitchratings.com 13
Corporates Telecommunications Colombia
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UNE EPM Telecomunicaciones S.A. Rating Report │ November 17, 2020 fitchratings.com 14