Fitch Affirms Entel's Credit Ratings: Stable Outlook

Fitch Ratings has affirmed Empresa Nacional de Telecomunicaciones S.A.'s (Entel) ratings, maintaining a stable outlook. The ratings reflect Fitch's expectations for sustained improvement in Entel's operating performance due to the solid position of its Chilean business and the positive cash flow momentum of its Peruvian operation. Fitch forecasts Entel's financial structure will remain solid, with gross and net leverage trending toward 2.5x and 2.0x, respectively, in the medium term.

Entel's ratings consider its solid market position in Chile and Peru, strong brand recognition, and network competitiveness, enabling it to defend its competitive position and Average Revenue Per User (ARPU) in both countries. The ratings also reflect Entel's increasingly diverse revenue streams in Chile and Peru.

Cost pressures driven by high inflation and peso weakness impacted EBITDA. However, Fitch expects gross debt and net debt to EBITDA to return to around 2.5x and 2.0x over the rating horizon, respectively, due to gradually improving EBITDA levels. Entel benefits from a manageable amortization schedule and low refinancing risk.

Entel's Chilean operation demonstrated strong resiliency and improving results despite strong competition. Revenues increased modestly along with a growing customer base in 2022, though EBITDA margins fell due to inflation and FX impact in Entel's cost structure, among other factors. Entel sustained its mobile voice and data market share in the 32%-34% range.

Since the start of its Peruvian operation nine years ago, Entel has posted continued growth, reaching 10 million mobile subscribers in 2022. Fitch expects continued growth, albeit at a lower pace, as Entel consolidates its 24% market share in Peru and grows to 11.5 million customers by the end of 2025.

Entel's geographic diversification has improved due to the sustainable profitability of its Peruvian franchise. Entel's service diversification has also improved as it supplements its core mobile product with a growing fixed business. In this context, the last fiber optic spinoff agreement with Infraco (KKR/Telefonica Affiliate) will allow a significant boost in this business segment in the medium term.

Fitch forecasts capex intensity of 21% of revenues in 2023, growing to 23% in 2024, before declining to 20% in subsequent periods. These capex levels will fully consume cash flow from operations, driving negative pre-dividend free cash flow in 2023 and 2024, before turning positive in 2025 as capex normalizes and the Peruvian operation grows its EBITDA contribution.

Entel's ratings incorporate an expectation that the company will maintain a flexible dividend policy to sustain a BBB capital structure. This will likely entail maintaining a dividend payout between 50%-80% or lower in the case of severe pressure to operating performance.

Entel has a leading mobile market position in Chile, backed by strong network competitiveness and brand recognition, which enables stable cash flow generation from the country. Its market position in Peru continues to grow. Entel's direct domestic competitor, Telefonica Moviles Chile S.A. (TMCH; BBB+/Negative), has slightly lower projected leverage than Entel and its cash flow generation is more diversified in terms of types of services.

In summary, Fitch Ratings has maintained Entel's ratings, reflecting its solid market position in Chile and Peru, strong brand recognition, and network competitiveness, which allows the company to defend its competitive position and ARPU in both countries. The ratings also reflect Entel's increasingly diverse revenue streams in Chile and Peru. The stable outlook is supported by expectations for sustained improvement in Entel's operating performance, solid financial