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Fitch Expects to Rate Comcel Trust's Senior Notes 'BB+(EXP)'

January 23, 2014

CHICAGO --(BUSINESS WIRE)-- Fitch Ratings expects to rate Comcel Trust's (Comcel) proposed USD500 million senior unsecured notes 'BB+(EXP)'. Fitch has also assigned a Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) of 'BB+' to Comcel. The Rating Outlook on the IDRs is Stable. Comcel Trust is a special-purpose vehicle (SPV) created in the Cayman Islands to issue the notes on behalf of Tigo Guatemala Group (Tigo Guatemala ), a group of several legal entities providing primarily mobile telecommunication services under the Tigo brand. The ratings of the trust are based on the combined credit profile of Tigo Guatemala, which entities joint and severally guarantees the note on a senior unsecured basis. The proceeds from the notes will primarily be used for a full repayment of Tigo Guatemala's outstanding debt, which amounted to USD425 million as of Sept. 30, 2013 , and the remainder will be used for a shareholder payout. KEY RATING DRIVERS Leading Market Position Tigo Guatemala, 55% owned by Millicom International Cellular S.A (MIC; rated 'BB+' with a Stable Outlook), is the largest mobile service provider in Guatemala , with a 53.7% of subscriber market share as of Sept. 30, 2013 . As the first mobile service operator in Guatemala since 1990, the company has established an entrenched market position backed by its extensive network and distribution coverage, stable quality of service, as well as strong brand recognition of the 'Tigo' name. In addition, the company's customized promotion strategy, especially for high-end subscribers, has enabled its EBITDA market share to account for over 60% of the industry, well above its subscriber market share. Fitch believes that Tigo Guatemala's competitive advantage, partly supported by MIC's industry expertise, will remain intact and help ward off price-driven competition from its peers to a certain extent over the medium- to long-term. Slow Revenue Growth Fitch forecasts that Tigo Guatemala's top-line growth will be slow, in the low- to mid-single digits in 2014 and 2015, given the maturity of the Guatemalan mobile industry with an over-100% penetration rate. Fitch believes that the continued decline in traditional voice revenues will be somewhat offset by the positive impact from increasing data revenues, which are being driven by higher smartphone usage and data plan adoption rates, estimated at 11% and 30% at the end of third-quarter 2013, respectively. The revenue contribution from non-mobile business is growing but the overall proportion will remain small, below 10%over the short- to medium-term as these business segments remain under-penetrated. Margins Falling but Still Strong Tigo Guatemala boasts one of the highest operating margins among the telecom operators in the region with its EBITDA margin of 51.5% in the first nine months of 2013. This margin is a decline from an average of around 60% between 2008 through 2012. However, Fitch forecasts that the company's EBITDA margin will continue to trend down toward 45% over the medium term due to persistent high levels of competition. In addition, the revenue mix will become more unfavourable as the contribution from the most profitable prepaid mobile service gradually declines while revenue from postpaid subscribers, mostly supported by handset subsidies, and revenues from lower margin fixed-line and solution businesses grow. Fitch forecasts EBITDA margin of 45%-50% in 2014-2016, which still compares quite favorably to its regional peers. Moderately Low Leverage Fitch expects that the company will maintain moderately low financial leverage for the rating category, measured by total adjusted net debt to EBITDAR of below 2.0x over the medium term (2012 and LTM September 2013 : 1.0x). The company's pre-dividend free cash flow (FCF) should remain strong in 2014 and 2015 as cash flow from operations (CFO), projected to be around USD520 million in that period, should comfortably cover its annual capex requirement of USD250 million . Although Fitch forecasts leverage will slightly increase to 1.3x due to the proposed bond issue and Tigo Guatemala's continued aggressive dividend policy, leverage will remain commensurate with the proposed rating level over the medium term. Aggressive Shareholder Payout Policy The company has an aggressive shareholder payout policy in place and Fitch believes this will continue to weigh on its financial profile, as Fitch expects the company will maintain this policy for the foreseeable future, which will lead to slightly negative FCF generation. Therefore, Fitch does not foresee any meaningful change in the company's financial profile over the long term despite its stable performance. Benign Regulatory Environment The Guatemalan telecom industry has limited regulation, as evidenced by the absence of material intervention in market competition, and/or asymmetrical regulation imposed by the regulatory body. Tariff policies are not subject to the regulatory review, and the interconnection rates are set by private contracts, all of which benefit the incumbent operator. In addition, there is no regulation on number portability. Fitch sees no indication of an adverse change in the regulatory stance that could materially affect operational landscape of Tigo Guatemala in the near term given the high level of competition, quality of service, and consumer affordability. In such an environment, the company should be able to continue to develop business strategies utilizing its largest-scale benefit to maintain its market position. Limited Geographical Diversification Tigo Guatemala's credit profile is tempered by its lack of geographical diversification. The company operates only in Guatemala and is significantly exposed to overall macroeconomic and political conditions of the country; GDP per capita was estimated to be USD3,500 in 2013. Although the company generates over 20% of its total revenue in USD primarily through international roaming/interconnection fees and calling cards, this revenue portion is also based on the operation in Guatemala . In Fitch's view, the company has limited room for growth and its scale of cash generation will remain relatively small compared to regional and global peers. RATING SENSITIVITIES Negative rating action could be considered in the case of an increase in net debt-to-EBITDAR above 2.0x-2.5x without a clear path to deleveraging due to any one or combination of the following: deterioration in MIC's financial profile leading to more aggressive shareholder distributions, weaker cash generation due to competitive or regulatory pressures on its operations, and M&A activity. Positive rating action could be considered if financial leverage improves towards 1x on a sustained basis due to improvement in its operational competitiveness and resultant stronger cash generation, less aggressive shareholder returns, or a higher level of operational or geographical diversification. Additional information is available on www.fitchratings.com Applicable Criteria and Related Research : --'Corporate Rating Methodology' ( Aug. 5, 2013 ); --'Evaluating Corporate Governance' ( Dec. 13, 2011 ). Applicable Criteria and Related Research : Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139 Evaluating Corporate Governance http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816582 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst Alvin Lim , CFA, +1 312-368-3114 Director Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 USA or Secondary Analyst Vanessa Villalobos , +506 2 296 9182 Associate Director or Committee Chair Daniel Kastholm , CFA, +1 312-368-2070 Managing Director or Media Relations: Elizabeth Fogerty , +1 212-908-0526 elizabeth.fogerty@fitchratings.com Source: Fitch Ratings


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