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Telecom Business Review | Friday, April 30, 2021
Fitch Ratings expects the Latin American telecom sector to continue investing in 5G, reducing leverage headroom for some issuers.
FREMONT, CA: Fitch Ratings says that the Latin American telecommunications sector will continue investing more money into 5G technology. This will cause some issuers to have less room to borrow in the future. But in the short term, 5G investments do not affect the credit of Fitch-rated issuers because the end of other investment programs, the sharing of infrastructure, and the proceeds from the sale or spinoff of assets lessen the effects on cash flow and balance sheets.
The 5G rollout is happening all over the world. In the past few years, telecom companies in the US have spent billions of dollars on the spectrum, but the process is just getting started in Latin America. Chile and Brazil were the first to hold 5G spectrum auctions last year. In Brazil, telecom companies paid a total of USD8.5 billion; in Chile, they paid USD453 million to get the best radio frequency for coverage and capacity. Regulators have put in place long-term obligations, meaning network investments should start this year.
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Spectrum and network technology are significant investments that take years to pay off. Since EBITDA goes down when average revenue per unit decreases, this could cause operators to take on more debt and use more leverage in the medium to long term. Returns on investments are also likely to be low until the demand for 5G phones increases significantly from where it is now. Companies with enough cash on hand and the ability to change how they spend their money should be able to invest in building out 5G networks without hurting their credit profiles.
In Chile, for example, regulators and industry sources estimate that between USD4 billion and USD14 billion will be spent on 5G from 2021 to 2025, on top of the USD453 million spent on the spectrum at the start. Over the three years ending in 2023, Entel (BBB-/Stable) and Telefonica Moviles Chile (BBB+/Stable) plan to invest $200 million and $300 million, respectively, in 5G. This is about 15 percent to 20 percent of Fitch's projected capex. Both companies have good financial flexibility, which has been improved by the sale of assets, the ability to change how dividends are paid, or the ability to reduce the amount of capex spent on other things.
Asset sales or spinoffs and infrastructure sharing, like Telefonica Brasil's Vivo joint venture with Caisse de Depot et Placement du Quebec (CDPQ) to build a wholesale fiber optic network in Brazil, could continue across the sector, given the investment needed for 5G service capabilities. But asset sales and spinoffs could slow down if rising interest rates hurt valuations and buyers lose interest, even though some assets, like antennas and fiber optics infrastructure, have a high market value because of the demand for data.
Over the medium term, higher investments in fiber optics and 5G networks will likely pressure the sector's median capex intensity, even though spending is partially offset by capex related to sold or spun-off assets. The median capex for the industry is anticipated to go down from around 17 percent in 2022 to 20 percent.
This month, the Mexican agency in charge of telecommunications confirmed that the auction for the 5G spectrum for mobile services would take place this year. Mexico, Peru, and Colombia all put off auctions because of the pandemic, and the Colombian government could announce more delays because of the presidential and parliamentary elections this year. Spectrum and the obligations that come with it will likely end up costing a lot in these countries. The government sets the starting base prices for auctions, which could make them higher than usual if it needs to make more money after spending on a pandemic.
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