Median Net Leverage in the Latin American Telecommunications Industry

Telecom Business Review | Thursday, August 12, 2021

Latin American telecommunications will continue to invest in 5G technology, resulting in a decline in leverage headroom for some issuers.

FREMONT, CA: Fitch Ratings predicts that the Latin American telecoms sector will continue to boost expenditures in 5G technology, reducing the leverage headroom of some issuers over time. The conclusion of other investment programs, infrastructure sharing, and profits from the sale or spinoff of assets mitigate the cash flow and balance sheet effects of 5G investments for Fitch-rated issuers in the short term. Analysts expect the median net debt/EBITDA ratio to remain at 2.5x in 2022.

In recent years, telecom corporations in the United States have spent billions of dollars purchasing spectrum for the 5G rollout, but the process is still in its infancy in Latin America. Chile and Brazil were the first nations to undertake 5G spectrum auctions in 2017, with telecom operators in Brazil spending a total of USD8.5 billion and those in Chile spending USD453 million to obtain radio frequency with the best coverage and capacity. As a result of multiyear commitments imposed by authorities, network investments are anticipated to commence in 2019.

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Spectrum and network technologies are substantial multiyear investments that could lead to a rise in operator debt and leverage in the medium to long term, given the impact of diminishing average revenue per unit. Returns on investment are also likely to remain poor until the current low demand for 5G handsets improves dramatically. Companies with sufficient liquidity and the ability to alter capital allocation should be able to participate in the deployment of 5G networks without negatively impacting their credit scores.

In Chile, for instance, authorities and industry sources expect USD4 billion to USD14 billion in aggregate 5G expenditures between 2021 and 2025, in addition to the initial spectrum expenditure of USD453 million. Entel (BBB-/Stable) and Telefonica Moviles Chile (BBB+/Stable) will invest $200 million and $300 million in 5G over the three years ending in 2023, representing around 15 percent to 20 percent of Fitch's anticipated expenditure. The sale of assets, dividend flexibility, and the option to cut capital expenditures devoted to other issues have contributed to both organizations' financial flexibility.

Given the investment required for 5G service capabilities, asset sales or spinoffs and infrastructure sharing arrangements like Telefonica Brasil's Vivo joint venture with Caisse de Depot et Placement du Quebec (CDPQ) to develop a wholesale fiber optic network in Brazil could continue across the sector. However, the pace of asset sales and spinoffs could decrease if rising interest rates impact values and buyer enthusiasm declines. However, certain assets, such as antennas and fiber-optic infrastructure, have a high commercial value due to the demand for data.

Despite capex associated with sold or spun-off assets, the sector's median capex intensity is expected to remain high over the medium term due to higher investments in fiber optics and 5G networks. Analysts predict that investing programs will decline from 20 percent to 17 percent in 2022, from 19 percent to 17 percent.

The Mexican telecommunications authority stated that the auction of 5G spectrum for mobile services would occur this year. Mexico, Peru, and Colombia have all postponed auctions due to the epidemic. Analysts anticipate that the Colombian government will announce additional postponements due to this year's presidential and parliamentary elections. The eventual cost of spectrum and accompanying commitments will likely be significant in many nations. Governments determine the starting base prices for auctions, which may be higher than usual because of the need to increase revenue following pandemic-driven spending.

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