FITCH RATINGS on Tuesday said it downgraded PLDT, Inc.’s long-term foreign- and local-currency issuer default rating (IDR) to “BBB” from “BBB+,” as it embarks on an aggressive capital expenditure (capex) program amid the government’s push for a third telecommunications player.
“The rating action reflects our expectations of PLDT’s weakening credit metrics as a result of its more aggressive capex strategy over the next three years. The company is also likely to rely on further debt financing, given the anticipated slow recovery in EBITDA (earnings before interest, tax, depreciation and amortization). This is despite its stated intention to fund the additional capex through asset sales,” the debt watcher said in a report released on Tuesday.
At the same time, Fitch affirmed the telecommunications giant’s national long-term rating at AAA(phl). It also maintained its stable outlook on PLDT.
PLDT is ramping up its capital expenditures this year, to address network issues as well as prepare for increased competition with the entry of a third player in the industry. It has earmarked P58 billion in capex this year, from P37 billion a year ago.
Fitch said it expects the company’s capex/revenue ratio to grow 35% to 36% over the next three years from only 23% last year.
“PLDT’s higher capex spend should help it retain its network strength, ahead of a third telecom operator’s entry. The aggressive expansion in fixed-line infrastructure underscores PLDT’s fiber strategy to capture growth in the home broadband and enterprise segment,” it said.
Fitch said the rating case projections “assume free cash flow would remain negative for the next three years, given the high capex and continuing dividend commitments.”
“We expect progressive EBITDA improvements from growth in home and enterprise revenues to offset weakness in the wireless segment. PLDT expects to return to growth in both revenues and profitability in 2018,” Fitch said.
Fitch also cited the government’s plans to attract a third player in the industry as a credit negative for PLDT, as well as its rival Globe Telecom, Inc.
“[I]t is ultimately likely to intensify competition and dilute the market share of incumbent operators,” it added.
Meanwhile, Fitch kept Globe’s long-term foreign- and local-currency IDR at “BBB-,” because of its “lower net leverage, better liquidity profile and robust position in both fixed and wireless markets.” It also affirmed its national long-term rating of “AAA(phl)” for Globe.
“Globe’s ratings reflect its established position as the second-largest telecom operator in the Philippines’ duopoly market, and its moderate net leverage. Rating headroom is likely to narrow as higher capex and ongoing dividend commitments will weigh on Globe’s balance sheet,” Fitch said.
The company’s net leverage is expected to still be around 3.5 times, a level that Fitch finds consistent with Globe’s rating.
Fitch said the increase in Globe’s capex is seen to drive its leverage, after the telco company boosted its spending to $950 million for its long-term evolution and fixed-wireless rollout.
It noted the capex/revenue ratio of Globe is likely to grow 32% to 36% in the next three years from only 31.4% in 2017.
The credit rater said that between Globe and PLDT, the former is seen to be more vulnerable with the expected entry of a third telco player, as “PLDT has a stronger fixed-line offering, allowing a firmer cushion against pricing pressure from the mobile services.”
Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has a stake in BusinessWorld through the Philippine Star Group, which it controls. — Denise A. Valdez
