5G investments to test Chilean telco financial flexibility and leverage
Chilean telecommunication companies’ financial flexibility will be tested by investments in 5G and fiber optic networks, with issuers’ level of investment dependent on their financial strength and ability to divert resources towards fifth generation wireless communication, says Fitch Ratings.
We expect investments to be funded with cash, asset sales and additional debt, which could increase net leverage and pressure companies’ credit profiles.
5G technology will transform the Chilean telecommunications sector from one focused solely on voice and data into one with a more diversified suite of applications and services, including virtual reality/augmented reality/gaming, video calls/virtual meetings, wearables, mobile cloud computing and industrial automation. The features of 5G networks will also materially improve the experience of consumers currently receiving service from operators.
However, we expect the pricing power of Chilean operators to be challenged in the consumer segment due to significant competition, low customer awareness of the benefits of 5G technology and uncertainty regarding the degree and speed of 5G-enabled handset adoption. These factors will likely delay the return on investment for operators.
Regulators and industry sources estimate 5G investments of USD4 billion to USD14 billion in aggregate from 2021 through 2025. The initial investment totalled USD450 million and was made during the spectrum auction this year, which more than tripled overall spectrum assigned at the national level.
Empresa Nacional de Telecomunicaciones, S.A. (ENTEL, BBB-/Stable), Telefonica Moviles Chile S.A. (BBB+/Stable) and WOM S.A. (BB-/Stable), among others, were awarded spectrum blocks and have three years to put the technology into operation.
WOM, which was awarded the largest number of spectrum blocks, announced investments of around USD450 million to USD500 million over the three-year period ending in 2023. These investments represent around 50% of Fitch’s projected capex for WOM for the 2021-2023 period.
The company recently issued a USD450 million senior bond that strengthened its liquidity and helped prepare it for increased spending. WOM is also exploring a potential sale of towers, which would strongly support liquidity and strengthen its ability to finance 5G and fiber optic network investments.
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We expect ENTEL and Telefonica’s investments in 5G to be between USD 200 million and USD300 million over the three-year period ending in 2023 or around 15% to 20% of our projected capex for these companies. ENTEL’s financial flexibility is solid, due in part to improved operational performance and a tower sale in 2019 leading to CLP527 billion of liquidity at the end of June 2021.
Leverage metrics will be pressured by the 5G and fiber investments for all the awarded operators but are expected to remain at or below Fitch’s negative rating sensitivity over the rating horizon.
We expect Telefonica’s net leverage to increase to around 2.0x by 2023, above the historical average of around 1.0x, due in part to cash used for 5G investments. Factors that would allow Telefonica to face material investments in 5G without affecting its credit rating include dividend flexibility to its parent and its ability to reduce capex allocated toward other items.
