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Rating Action:

Moody's Downgrades ETB to Ba3; Negative Outlook

19 Sep 2016

New York, September 19, 2016 -- Moody's Investors Service, ("Moody's") today downgraded Empresa de Telecom de Bogota S.A. ESP's (ETB) corporate family and senior unsecured ratings to Ba3 from Ba1. At the same time, Moody's changed the outlook to negative, from stable.

RATINGS RATIONALE

The ratings downgrade reflects our revision of expectations for government support for ETB to moderate from strong, as the Secretary of Finance of the Capital District is actively analyzing the sale of a majority position in the company to a third-party (to be determined). In Moody's view, ETB has become a less strategic asset for the City of Bogotá. Also incorporated in the downgrade are ETB´s weaker liquidity position and deteriorating operating performance with limited room for recovery over the next eighteen months.

Lower than expected revenues from fiber optics broadband and pay TV business segments amid intense competition in combination with a heavy investment phase have been weakening ETB's credit profile since 2014. Despite lower capital spending beginning in 2016, the company's operating liquidity and cash position will remain tight according to Moody's projections, with dependence on external funding for working capital and capital spending needs.

The negative outlook on the ratings reflects ongoing high execution risks associated with the integration and growth of ETB's new business segments and the likely need for incremental debt on a short-term basis in increasing amounts through 2018 to fund working capital and capital spending needs. Also, ongoing negative free cash flow despite lower capital spending and intense competitive pressures will weigh on performance, limiting improvements in the company's credit profile over the next eighteen to twenty-four months.

ETB's ratings reflect the application of Moody's joint default rating methodology for government-related issuers (GRIs). ETB's rating combines: (i) ETB's underlying baseline credit assessment (BCA) of b1, and (ii) the willingness and ability of the City of Bogota to provide credit support to ETB in a distress scenario. Accordingly, the model incorporates the expectation of a very high default correlation, based on their shared revenue base (mostly limited to the City of Bogota) and moderate financial and operational linkage, and a moderate expected level of support by the City of Bogota in the event of financial stress.

ETB's rating also incorporates the company's leading fixed line and broadband market positions in the City of Bogota and its comfortable debt maturity profile. Simultaneously, it reflects ETB's small size compared to global peers, limitations associated with the company's new business model, and intense competition in the mobile and pay TV segments from larger, better capitalized operators. The assessment furthermore integrates negative free cash flow and weaker credit metrics, as adjusted by Moody's.

ETB's liquidity is tight, as the company is dependent on access to short-term facilities to meet its operating needs. As of June 30, 2016, the company had approximately COP 288 billion (USD 99 million) on hand, enough to cover short term debt obligations totaling COP 46 billion (USD 16 million) over six times. Remaining outstanding debt totaling COP 530 billion (USD 182 million) matures until 2023. Despite a comfortable maturity profile, the company's cash balance has been decreasing steadily in line with ongoing negative free cash flow. While lower capital spending going forward will support a more stable cash position, the company has recently started funding ongoing operational and capital investment needs with short-term debt. The ratings could be downgraded if ETB's credit profile or liquidity deteriorates further. Specifically, if sustained EBITDA margins approach 20%, leverage increases above 4.0 times, its ratings could be downgraded.

A ratings upgrade is unlikely given the company's reduced margins, higher leverage and ongoing negative free cash flow in combination with lower government support. However, if ETB is able to combat competitive pressures and successfully executes its new business strategy while growing market shares and profitability, with adjusted EBITDA margins above 30% and adjusted gross debt to free cash flow above 6%, as adjusted by Moody's, a ratings upgrade could be considered. In order to consider a positive rating action, we would need to ascertain strong shareholder support and a commitment to return to a more conservative financial strategy.

Empresa de Telecomunicaciones de Bogota S.A. ESP ("ETB") is an incumbent telecommunications service provider offering fixed and mobile, broadband and pay TV services to Colombia's capital and surrounding areas. The company has leading fixed line and broadband market positions in the City of Bogota, which account for about 37% and 28% of total revenues, respectively. In 2014, the company expanded into the fiber optics broadband, pay TV, and mobile sectors, which today account for another 19% of sales. During the last twelve months ended June 30, 2016, ETB's revenues reached USD 496 million (COP 1,513 billion).

The City of Bogota (Bogota, Distrito Capital - rated Baa2, stable) is ETB's controlling shareholder with over 87% of the company's capital stock. Approximately 12% of the shares are free float, publically traded on the Colombian stock exchange. Currently, the Secretary of Finance of the Capital District is actively analyzing the sale of its participation in the company to a third-party (to be determined).

The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Marcos Schmidt
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
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Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

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​
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