Fitch downgrades PLDT credit rating

MANILA, Philippines - London-based Fitch Ratings has downgraded its credit rating for Philippine Long Distance Telephone Co. (PLDT) on expectations of lower cash flow from business operations amid large capital spending.

In a statement, Fitch said it has downgraded the long-term local currency issuer default rating (LC IDR) of PLDT to BBB+ to A-.

The agency meanwhile, reaffirmed PLDT’s long-term foreign currency IDR and its foreign-currency senior unsecured rating at BBB.

Fitch likewise affirmed the national rating at AAA, while the outlook on the issuer ratings remained stable.

“The downgrade on the LC IDR reflects our expectation of a further deterioration in PLDT’s funds funds from operation – adjusted net leverage to 2.5x  in 2015 to 2017 (2014: 1.9x) due to significant capex expansion,” the agency said.

PLDT’s capital expenditures are expected to hit a record of P43 billion this year as it upgrades its infrastructure for improved network and data connectivity.

The telecom provider has likewise earmarked $100 million for digital acquisitions this year.

Fitch said the telco firm’s expansion in 3G or 4G is likely to push the capex or revenue ratio to 25 percent in 2015 to 2016 from 20 percent in 2014, and normalize to 20 percent of revenue after next year.

It also said the company’s operating EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs) would likely weaken to about P77 billion this year from P80 billion in 2014 due to flat revenue and continued pressure on margins.

Furthermore, the changing revenue mix and the build-out of the digital business are seen to erode operating EBITDAR margin to 44 to 45 percent this year from the previous year’s 46.6 percent.

Fitch expects losses in the digital business over the next three years.

The agency noted, however, PLDT continues to have strong liquidity with cash balance of P37.2 billion as of the first-half, sufficient to cover the P16.7 billion short-term obligations maturing over the next 12 months.

Debt maturities are well spread out with over 60 percent of total debt due after 2017. The firm also has strong access to local banks and the retail bond market, given its solid financial and leading market position in the Philippines.

While the telco is seen to sustain its market leadership in the Philippine market, Fitch said the entry of Telstra Corp. Ltd. and San Miguel Corp. in the telecommunications market would intensify competition over the longer term.