In order to fund significant investment requirements for the deployment of fibre optic and 5G networks and offset cash flow pressure from increased competition, Latin American telecom companies are taking advantage of strong investor demand by selling infrastructure assets, such as cell towers and data centres. The usage of the money and the design of the long-term lease-back agreements for the sold assets will both have an impact on their ratings.
In terms of operator tower ownership, the LatAm area has one of the lowest rates internationally, with operator tower ownership declining to approximately 25% in 2021 from around 50% during the previous five years. In Latin America, the percentage of tower leasing varies greatly amongst issuers, ranging from nearly zero to 100 percent. WOM’s July sale of 3,800 of its planned and existing towers to Phoenix Tower International for USD930 million in cash is a recent example. Experts estimate that just a small portion of this money will be used to pay off debt.
Companies typically need to adopt proactive, compensating actions to counteract the decrease in assets accessible to creditors in order to maintain ratings. As of now, telecom operators (telcos) have generally used the proceeds of the transactions to balance the various credit concerns resulting from the transactions in a ratings-neutral manner.
Operating leases have a leveraging effect because most businesses used the proceeds to lower debt or boost cash. Limited funds were transferred for dividend payments. Key rating factors include how asset sales and leasebacks affect future operating results, financial flexibility, and overall business profile risk evaluations.
Given that sales and leasebacks of infrastructure represent a fundamental financing choice, we anticipate putting more emphasis on lease-adjusted leverage indicators to improve comparability among corporate issuers of non-financial securities.
Comparing lease-adjusted measures to net debt/recurring operating EBITDA reveals superior metrics for issuers that are monetizing the majority of their infrastructure. For issuers like WOM and Coltel, which have monetized assets during the previous 12 months, experts anticipate that the gap between metrics will widen.
Mainly because these assets raise entry hurdles, maintaining network ownership can give businesses significant benefits, especially in duopolistic marketplaces like those in Paraguay or Guatemala. This advantage vanished in markets with market fragmentation, such as Chile and Peru, which made these sales more alluring.
Higher customer turnover rates, price competitiveness, and lower margins are typical characteristics of marketplaces that are more competitive. In competitive markets, mobile service quality—including coverage and capacity—as well as broadband speed and reliability—tend to be better as businesses invest more to set themselves apart and win and keep customers.
Asset monetization reduces network ownership and necessitates the signing of long-term agreements with infrastructure providers, which increases reliance on the provider and raises operational costs. To determine how much flexibility the lease agreement provisions offer the telco operator, it has to be carefully studied.
The length of the lease, renewal options, rent escalators, and whether or not it is a unitary, master lease are important factors to take into account. The second option may offer less flexibility for managing assets during renewal. Infrastructure businesses may use their assets more effectively and distribute fixed costs among more tenants, which will cut operational costs for the telco tenants.
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