Wall Street’s S&P Ratings Group Sees Strong Outlook for UNE-EPM

While the Medellin City Council is mulling Medellin Mayor Daniel Quintero’s proposed sale of EPM’s 50% stake in the UNE-EPM telecom/internet/cell-phone/cable-TV joint venture with Spain-based Millicom, a new report from Wall Street bond rater S&P (BRC Ratings) ironically sees a brighter outlook for the unit, contradicting Quintero’s gloom.

In an October 4 filing with Colombia’s Superfinanciera oversight agency, UNE-EPM discloses the latest S&P/BRC ratings report, which finds that the UNE-EPM internet/telecom unit – commercially known as “Tigo” — continues to enjoy a strong “AAA” bond rating.

“For the next few years we project profitability margins close to 32.5% and leverage indicators (measured as net debt to EBITDA) around 2-x (times), which we consider consistent with the rating,” according to the ratings agency.

“Despite an environment of greater competition and high investment commitments, the generation of the company’s own resources will continue to provide favorable levels of liquidity for the continuity of its operation, which reflects a ratio of sources-over-uses above 1.2-x for the next two years.

“Our assessment of Tigo reflects its favorable market position in most of its business lines. It ranks second as the most relevant operator in the internet, fixed telephony and TV segments, and the third in the mobile [cell-phone] market nationwide.

“This is supported by an adequate spectrum mix between the high and low bands after the award of access to 40 megahertz (MHz) of 700 MHz in 2019, which we believe will continue to provide a competitive advantage in the telecommunications industry in terms of higher levels of digitization and coverage.

“Despite increased competition in 2021, all business segments maintain favorable results,” according to the report.

While UNE-EPM posted a net loss in 2020, “as of June 2021, consolidated revenues grew 6.5% compared to the same period of the previous year, a result that contrasts with the negative 1.2% of 2020 that incorporates the effects of the pandemic, and which is above the record of the last three years,” according to the report.

“In the next two years, we estimate that the home segment will mitigate the reductions in the mobile business and the small and medium-sized business market, so we project revenue growth of close to 4% in the next two years.

“The strengthening of its sales channels and the greater offer of prices have pressured profitability margins by about 1.6 percentage points during the first half of 2021, registering an EBITDA margin of 32.4% from 34% in 2020.

“In our opinion, the cost of these measures will be offset by the higher level of consumption offered by the sustainability of its customer base. Thus, for the next two years we estimate margins above 32.5%, in line with the rating agency’s expectations,” according to BRC.

“We project relatively stable levels of leverage over 2x, even under the continuity of its operational and investment commitments. Under the current scenario of cash flow generation, we do not foresee that the company will increase its debt in the next two years, because these resources will continue to be adequate to fulfill its investment plans, the commitments acquired in the 700 megahertz auction (MHz) of 2019, and the payment of the renewal of their spectrum licenses.

“This result compares favorably with that of its peers within the same industry and companies within the same rating at the national level,” BRC added.

UNE-EPM “maintains strict control of the stability of its debt levels and maturity profiles, for which in 2021 it advanced the prepayment of US$150 million of its syndicated debt against the issuance of bonds at the local level. This in order to minimize its exchange rate exposure, which, as of June 2021, its debt in dollars was close to 20.2% of the total, down from 36.7% in 2020, and [the company has] improved its payment profile which, to date of this review, it maintained an average term of more than six years,” the report explains.

As for the capex forecast, UNE-EPM will be spending “between 5% and 6% of income generation for 2021 and 2022, a share that would remain in line with what the company budgets,” according to BRC.

“Under our liquidity scenario, cash sources will be above 1.2-x and 1.3-x in the next 12 and 24 months, respectively. This result allows us to confirm that Tigo will have adequate resources to meet its operational requirements and payment of financial obligations.

“In addition, we consider that the company has mechanisms to face stress scenarios, such as the flexibility of its investment plan, access to the capital market and available quotas in the financial system, which, as of June 2021, amount to a value of COP$3.6 trillion [US$948 million],” according to the report.