Another upgrade in PH rating key to higher debt score for PLDT

MANILA - Philippine Long Distance Telephone Company (PLDT) would have to wait for the government to bag another credit rating upgrade before the telco can enjoy any increase in its debt score, Fitch Ratings Inc said today.

In a statement, Fitch said it would keep PLDT's long-term foreign-currency issuer default rating (IDR) and senior unsecured rating at 'BBB' for now, assigning a stable outlook, which means no change for the next six months to a year.

The telco's long-term local-currency IDR and national long-term rating likewise were affirmed at 'A' and 'AAA', respectively.

A credit rating upgrade bodes well for a company or a government, as this reduces the cost of borrowing. Also called leverage, borrowing is the cheaper mode of financing the expansion of telcos and other utilities, which require heavy doses of capital expenditures to improve their service.

In the case of PLDT, Fitch expects capex to decline from the peak of P36 billion last year to P30 billion this year, after the telco completed its network upgrade.

Fitch said PLDT's ratings reflect the telco's dominant market share at more than 65 percent of the wireless, fixed-line and broadband segments at end-June.

As well, the ratings take into account PLDT's strong financial profile, particularly a high EBITDA margin of 45 percent and steady funds flow from operations-adjusted net leverage of 1.5 times at end-2012.

EBITDA refers to earnings before interest, taxes, depreciation and amortization, and as such is a proxy for cash flow from operations.

Fitch said any upgrade in PLDT's long-term foreign-currency IDR rating would hinge on a similar improvement in that of the Philippine government, which is also rated investment grade, but at a lower 'BBB-'.

Constraining PLDT's ratings is the downward pressure on its margins in light of the "intense" rivalry for subscribers, as well as the "structural shift" in the industry's growth drivers from traditional services such as voice calls and text messaging, to low-margin data services.

"Operators in the Philippines are aggressive in acquiring wireless subscribers, including offering tariff plans with unlimited calls, SMS and data usage, and offering subsidies rather than differentiated services," Fitch said.

"While the contribution from long-distance calls will fall, overall fixed-line revenue will increase due to strong data growth," the debt watcher said. 

In the first half of this year, PLDT posted a net income of P19.7 billion, up from last year's P19.3 billion. Consolidated service revenues climbed two percent to P81.1 billion from P79.73 billion last year.

The telco closed the first half with a subscriber base of 73.4 million. Of the total, flagship mobile unit Smart had 25.5 million while value brand Talk ‘N Text ended with 31.8 million as a result of 1.3 million net additions for the second quarter. Digitel had 16.1 million subscribers under the Sun Cellular brand.

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