Fitch Ratings has affirmed Cable & Wireless Communications Limited's (C&W) Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) at 'BB-'.
Fitch has also affirmed C&W Senior Finance Limited's unsecured notes, Coral-US Co-Borrower LLC's secured credit facilities, and Sable International Finance Limited's secured notes, revolver and term loan at 'BB-'/'RR4'. The Rating Outlook is Stable.
The ratings reflect C&W's leading market positions across well-diversified operating geographies and service offerings, underpinned by solid network competitiveness and leading B2C and B2B offerings. The ratings also reflect Fitch's expectations that parent company Liberty Latin America (LLA) will maintain moderately high levels of leverage as a result of acquisitions or cash upstream events.
Key Rating Drivers
Net Leverage Forecast of 4.0x-4.5x: Relatively stable EBITDA margins and growth in broadband and business-to-business (B2B) services should help the company delever modestly from an organic standpoint. Fitch forecasts C&W will maintain net leverage at the lower end of the 4.0x to 4.5x range over the medium term, absent acquisitions. LLA targets net proportionate leverage of around 4.0x at its main operating subsidiaries, although M&A activity or operating weakness in core markets could temporarily push leverage metrics toward 5.0x. Fitch expects a rebound in capital intensity to 16% of sales from 12% in 2021 mainly due to network upgrade and, to a lesser extent, from expansion.
Moderately Improving Operating Prospects: C&W's Panamanian business should improve over the medium term with the mobile market's consolidation and the synergies from Claro Panama, which should add around 750,000 subscribers. Claro has slightly greater postpaid penetration, which along with consolidation should lead to average revenue per user (ARPU) stabilization. The company's residential fixed-line segment has shown stronger growth in Panama and elsewhere, over the same timeframe, as multiplay packages and broadband growth have helped grow fixed-line ARPUs and revenues.
Strong Market Position: C&W has the number-one or number-two position in its major markets, many of which are a duopoly between C&W and Digicel Group Holdings Limited (CCC). The risk of new entrants in any given market is low given their relatively small size. C&W's largest mobile market, Panama is turning mainly into a two-player market from a four-player market after C&W reached an agreement to acquire the number three player while the number four player is exiting the market. While local legislation requires three operators to participate in this market, the economic prospects of a third operator in the near-term are questionable. C&W's revenues should be more resilient than speculative-grade issuers in the region, as the latter generally have a higher dependence on mobile revenues that are less sticky than subscription fixed-line and B2B service revenues.
Diversified Operator: The company's revenue mix per service is well-balanced, with business-to-customer (B2C) mobile accounting for 24% of total sales in 2021, B2C fixed-line at 27% and B2B at 49%. The company has a large presence in countries with dollarized/U.S. dollar-linked economies. The company's subsea cable business should continue to exhibit strong growth as data demand increases, and the residential fixed-line segment should be more resilient than mobile. The company's largest markets are Panama and Jamaica, which together account for 79% of mobile and 56% of fixed subscribers. The company has grown its footprint through M&A and consolidated ownership of its subsidiaries.
LLA Linkages: LLA's financial management involves moderately high amounts of leverage across its operating subsidiaries. While the credit pools are legally separate, LLA has a history of moving cash around the group for investments and acquisitions. This approach improves financial flexibility; however, it also limits the prospects for deleveraging. LLA also has a modest amount of debt (approximately USD400 million) at the parent company level, which is dependent on upstream cash from the subsidiaries. A deterioration of the financial profile of one of the credit pools, or the group more broadly, could potentially place more financial burdens on C&W, given LLA's acquisitive nature.
Instrument Ratings and Recovery Prospects: The secured debt at Sable International Finance Limited are secured by equity pledges in the various subsidiaries. Per Fitch's Corporates Recovery Ratings and Instrument Ratings Criteria, category 2 secured debt can be notched up to 'RR2'/'+2' from the IDR; however, the instrument ratings have been capped at 'RR4' due to Fitch's Country Specific Treatment of Recovery Ratings Rating Criteria. The C&W Senior Finance Limited unsecured notes are rated 'BB-'/'RR4', which is the same level of the IDR.
Derivation Summary
Compared to its sister company, VTR Finance N.V. (BB -/Stable), which focuses on the Chilean broadband and television markets, C&W has larger scale, better product and geographical diversification. VTR operates in Chile, which is less risky than several Caribbean markets but is very competitive. VTR is pending a transaction to merge with America Movil's Chilean operations, which hold a relevant position in the country's mobile market, in a 50-50 joint venture. VTR's leverage is around 5.5x, which is high, although Fitch expects the JV to carry slightly lower leverage than C&W.
Compared to its sister entity, Liberty Communications of Puerto Rico LLC (LCPR), C&W has larger scale and better geographical diversification, although C&W also operates in weaker operating environments. LCPR's net leverage is expected to be in the same 4.0-4.5x range as C&W.
Compared with competitor Digicel, C&W has a stronger financial profile and better product diversification. Digicel is also concentrated in markets with weaker operating environments and per capita incomes and more foreign exchange (FX) risk. Both companies' ratings reflect their approaches to corporate governance, although LLA's approach is much less hostile to creditors. Digicel has a large debt maturity due in 2023 at one of its subsidiaries, which faces significant refinancing risk.
Compared to WOM S.A. (BB -/Stable), C&W has greater diversification and scale and a history of positive FCF generation. WOM benefits from its status in Chile, a market that is close to a 50-50 post-paid/prepaid mobile. WOM's ratings reflect Fitch's expectations that the company will be managed to net leverage around 3.0x -3.5x, or around 1.0x -1.5x lower than C&W's leverage.
C&W operates in slightly more balanced markets when compared with Millicom International Cellular S.A.'s (BB+/Stable) subsidiaries, Comcel (CT Trust; BB+/Stable) and Telefonica Celular del Paraguay (Telecel; BB+/Stable), which have more dominant the market positions and significantly lower net leverage at around 3x and 2x, respectively. Millicom's consolidated leverage, at about 3x, is lower than LLA's at around 4x. Comcel's and Telecel's ratings reflect a strong linkage with their parent as Millicom heavily relies on these two wholly owned subsidiaries' dividend upstreams to service its debt.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- B2B revenues growing 2%-3% per year with subsea revenues growing at 4% -5%;
Net fixed customer additions of approximately 30,000 - 40,000 per year;
Fixed-line customer ARPUs rising in 2022 to USD47 per month before declining at around 1% per year in subsequent years;
Mobile subscribers growing to 4.5 million in 2024 from 3.5 million in 2021 mainly due to the Claro Panama acquisition (about 750,000 subscribers);
Mobile ARPUs decline on average at a 2% per year;
Total revenues growing to USD2.6 billion by YE 2024 from USD2.3 billion in 2021;
EBITDA margins of around 37% -38%, consistent with recent history, or around USD900 million -USD1.0 billion per year;
Capex of around 16% of revenue, or USD380 million -USD420 million per year;
Excess cash flow mostly returned to shareholders or kept for acquisitions or investments.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch does not anticipate an upgrade in the near term given C&W's and LLA's leverage profiles.
Longer-term positive actions are possible if debt-to-EBITDA and net debt-to-EBITDA are sustained below 4.50x and 4.25x, respectively, for C&W and LLA.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Total debt-to-EBITDA and net debt-to-EBITDA at C&W sustained above 5.25x and 5.00x, respectively, due to organic cash flow deterioration or M&A.
While the three credit pools are legally separate, LLA net debt-to-EBITDA sustained above 5.0x could result in negative rating actions for one or more rated entities in the group.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Solid Financial Flexibility: C&W's liquidity, access to internal financing and long-dated amortization profile all support the company's solid financial flexibility. As of March 31, 2022, C&W had cash of USD541 million against short-term debt (including accrued interest and related-party debt) of USD116 million. C&W has USD630 million under the C&W revolving credit facility and USD165 million under regional facilities, of which approximately USD70 million are fully committed. The company's amortization profile is long-dated, with the majority of the debt due after 2027. Fitch expects that the company will maintain cash balances of around USD400 million-USD500 million over the rating horizon.
Issuer Profile
Cable & Wireless Communications Limited is a U.K.-domiciled telecommunications provider that is owned by Liberty Latin America, a Bermuda-domiciled entity. The company provides B2C mobile, B2C fixed and B2B services to customers mainly in the Caribbean and Panama.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Cable & Wireless Communications Limited has an ESG Relevance Score of '4' for Exposure to Environmental Impacts due todue to its operations in a hurricane prone region, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Cable & Wireless Communications Limited has an ESG Relevance Score of '4' for Financial Transparency due to LLA's relatively opaque disclosure and financial management strategy, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
LIBERTY LATIN AMERICA LTD. 
