SYS-CON MEDIA Authors: Adine Deford, Cynthia Dunlop, Harry Trott, Xenia von Wedel, Peter Silva

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Fitch Affirms Telemovil's IDRs at 'BB'; Outlook Stable

Fitch Ratings has affirmed the foreign- and local-currency Issuer Default Ratings (IDRs) of Telemovil El Salvador, S.A. (Telemovil) and Telemovil Finance Co. Ltd (TF) at 'BB'. The Rating Outlook is Stable. Fitch has also affirmed USD310.6 million senior notes due 2017 issued by TF at 'BB'.

At the same time, Fitch has withdrawn the IDRs of TF as the entity is not considered analytically meaningful for the credit quality of the notes which have been issued out of it and fully guaranteed by Telemovil.

Telemovil's ratings reflect its diversified service offering, leading positions in the mobile and pay television segments in El Salvador, strong brand recognition, extensive network coverage, and moderate leverage for the rating category. The company's credit quality is tempered by a persistently high level of competition which continues to weigh on its market share and cash flow generation.

The ratings also factor in Telemovil's strong linkage with its parent, Millicom International Cellular S.A. (MIC) (rated 'BB+' by Fitch), which helps Telemovil to achieve synergies related to the larger scale of the parent and provides expertise in management. It also considers the payment of dividends and royalties to MIC and Telemovil's limited geographic diversification.

ARPU Decline Continues:

Telemovil's revenue growth is likely to remain weak in 2014 and 2015, following a 1% contraction in 2013, due to the continued erosion in mobile ARPU against the backdrop of the intense competition and mature industry conditions, as the penetration rate was approximately 120% at the end of June 2014. The company's mobile strategy is centered on mobile data revenue growth which is expected to offset further possible declines in voice revenues. In addition, aggressive tariff-based strategies from competitors could prevent any meaningful recovery in Telemovil's market share; market share has fallen to 36% at the end of second quarter 2014 (2Q'14) from 40% in 2013.

Margin Erosion:

Fitch forecasts Telemovil's EBITDA margin will trend down below 30% over the medium term due to continued pressures from competitors. The revenue mix will become even more unfavorable as the lucrative mobile voice revenues gradually decline while marketing costs, including handset subsidies, continue to increase, and the contribution from the lower margin fixed-line businesses grow. Telemovil's EBITDA margin fell to 31% during 2013 from 36% in 2013, as calculated by Fitch.

Strong Growth in Other Segments:

Positively, Telemovil's non-mobile segments, including pay-TV, broadband, and B2B solutions, which together accounted for 32% of total revenues in 2013, continued to grow strongly and this trend should continue over the medium term given the still low penetration of these types of services. Telemovil's offering of bundled services, with the newly launched Direct-To-Home TV, should help ward off the competitive threats to a certain extent and mitigate negative growth in the mobile business.

By 2017, Fitch expects the company's non-mobile segment is expected to account for almost 40% of total sales. Mobile finance solutions will remain the fastest growing segment in the company, with double-digit annual revenue growth, yet its earnings contribution will still be small over the medium term.

Positive Pre-Dividend FCF:

Telemovil should be able to maintain its positive pre-dividend free cash flow (FCF) generation over the medium term despite the increasing capex amid weak EBITDA growth. The company plans to increase capex by approximately 20-30% from the 2013 level, which will represent about 14%-15% of revenues during the period, primarily for 3G/Long Term Evolution (LTE) coverage and capacity, as well as for pay-TV and fixed-line services. The increase in capex should be covered by the cash flow from operations (CFFO) before dividends over the medium term.

In addition, dividend payment has decreased significantly, by about 75% from the 2010-2012 levels. Any significant increase in the shareholder distribution over the medium term should be limited given the company's large investment plans. In Fitch's view, Telemovil's upstream payment to the parent, aside from the regular royalty fees, could be flexible depending on its financial condition and the operational outlook.

Increased Leverage

Telemovil's financial net leverage, measured by adjusted net debt-to-EBTIDAR, is forecast to remain above 2.5x over the medium term as EBITDAR in absolute terms will be relatively stable. This figure compares with 2.3x and 1.9x at the end of 2013 and 2012, respectively. Excluding the lease adjustment, the company's net debt-to-EBITDA was 1.7x at end-2013.

The company's gross leverage will decrease to close to 3.0x during 2014 from 3.7x at the end of 2013 as the company has successfully completed its partial tender offer of USD139 million on its USD450 million bond due 2017 in April 2014.

The company's liquidity profile is good as it does not face any debt maturities until 2017. Telemovil held USD206 million of readily available cash as of March 31, 2014.

Rating Sensitivities

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Deterioration in the company's EBITDA and FCF generation along with weak revenue growth due to competitive pressures and such. factors as material loss in mobile market share, ARPU erosion, and substantial increase in marketing expenses;

--Worse-than-expected negative impact of the introduction of number portability and higher-than-expected auction prices for 4G spectrums;

--Change in MIC's financial policy, including larger cash upstreams from its subsidiaries, or any significant deterioration in the parent's credit profile.

Adjusted net debt-to-EBITDAR above 3.0x in conjunction with a weak liquidity profile on a sustained basis.

Positive: While ratings upgrades are not likely in the short- to medium-term due to the competitive operating environment, future developments that may, individually or collectively, lead to a positive rating action include:

--Reductions in net leverage below 2.0x on a sustained basis, driven by improved service diversification, enhanced market position, positive change in the competitive/regulatory environment, and/or explicit support from its parent MIC.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', May 28, 2014

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=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=850835

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.

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