Telecommunications Services of Trinidad -- Moody's affirms TSTT's B2 ratings on proposed add-on; stable outlook

Rating Action: Moody's affirms TSTT's B2 ratings on proposed add-on; stable outlookGlobal Credit Research - 17 Feb 2022New York, February 17, 2022 -- Moody's Investors Service ("Moody's") today affirmed the B2 corporate family rating (CFR) of Telecommunications Services of Trinidad and Tobago Limited (TSTT). The rating agency has also affirmed TSTT's B2 secured ratings on the company's senior secured notes including its two tranches, TTD680 million that the company plans to upsize to TTD1,360 million and its $300 million senior secured notes, both due 2029. The outlook remains stable.Proceeds from the add-on, if successfully executed, TTD680 million (equivalent to $100 million), will be used to finance the implementation of TSTT's operational restructuring and general corporate purposes.The affirmation of TSTT' ratings is based on Moody's assumption that the company will continue its deleverage trend towards 4 times including Moody's standard adjustments from relatively high levels (peak at 7.6 times in December 2020) over the next 18 months while maintaining good liquidity. The proposed operational restructure will bring savings of around TTD180 million per year moving the company's margins to the mid 30's, including Moody's standard adjustments, from 24.4% on average for the last three years. Moody's expects these savings to be permanent over time; however, given the declining revenue trend the rating agency also expects TSTT to use this flexibility to put in place commercial strategies to retain and even attract new customers in order to address the persistently declining revenue trend.Affirmations:..Issuer: Telecommunications Services of Trinidad.... Corporate Family Rating, Affirmed B2.... Baseline Credit Assessment, Affirmed b3....Senior Secured Regular Bond/Debenture, Affirmed B2Outlook Actions:..Issuer: Telecommunications Services of Trinidad....Outlook, Remains StableRATINGS RATIONALETSTT's b3 BCA reflects its leading market positions in the mobile, fixed voice and business to-business (B2B) segments in Trinidad & Tobago and its extensive offering, which comprises a full suite of services (mobile, fixed telephony, fixed internet, pay TV and B2B). The BCA also reflects TSTT's limited revenue and geographic concentration in a single, small market, which has some exposure to natural disasters. The telecom sector in Trinidad and Tobago is highly competitive and has already high penetration rates in comparison to regional standards, which constrains earnings growth.Being indirectly owned by the Government of Trinidad and Tobago (Trinidad and Tobago, Ba2 stable), TSTT's B2 CFR reflects the application of Moody's joint default analysis approach for Government-Related Issuers (GRIs) and combines: (i) TSTT's underlying BCA of b3, (ii) the Ba2 rating of Trinidad and Tobago, (iii) a high default dependence between TSTT and Trinidad and Tobago, and (iv) a moderate expected level of support by Trinidad and Tobago in the event of financial stress.Since 2016, TSTT started the implementation of a strategic plan, which has resulted in reduced costs through headcount reductions and aimed to increase revenue again, after several years of decline. The plan included heavy headcount reduction, already implemented for the most part, as well as a modernization of the company's networks, with the expansion of TSTT's LTE network and the implementation of fiber and fixed wireless networks to offer more compelling internet services to its customers. Through the years the company has been able to manage costs and improve EBITDA margin (as adjusted by Moody's) to 38% for the last twelve months ended December 2021. At the same time, TSTT managed to reduce leverage (gross debt/EBITDA, including Moody's adjustments) to 3.9 times, from 6.8 times in FYE March 19, (peak at 7.6 times in December 2020).Following the announced restructuring, Moody's believes that leverage will reach between 4.5-5 times and margins around 35% in the medium term given challenges related to the persistent negative trend in revenues. This trend has been further aggravated by the COVID-19 strict confinement measures implemented in Trinidad & Tobago, which drove revenues decline of 18% in the FYE March 21. The decline was partly driven by the intense competition, and the negative impact on the mobile segment, particularly prepaid, as well as the delays in the process of migrating the customers who were still on TSTT's copper network to its fiber or fixed wireless networks. Moody's expects a 5% drop in revenue in the FYE March 22 and stable revenues the following year, as confinement measures gradually ease, and churn decreases helped by network upgrades and commercial initiatives to gain new customers.TSTT liquidity is adequate, supported by the company's TTD426 million ($36 million) cash on hands as of December 31, 2021, which positively compares to the company's TTD170 million coming due in the next twelve months. This amount includes mostly vendor facilities and TTD37 million related to a TTD100 million unsecured commercial paper facility. The company does not have a backup facility, but it does not expect to use additional funds under this facility. Given the investments made in recent years, Moody's expects TSTT to continue posting positive free cash flow, as it has been the case since FYE March 2021 and LTM ended December 2021 at TTD371 million ($55 million) and TTD70 million ($10 million), respectively.The notes are senior secured, and the collateral includes first-priority fixed and floating charges over substantially all TSTT's assets. Senior secured debt represents the vast majority of TSTT's debt and the B2 rating of the notes is aligned with the B2 CFR.The stable outlook reflects Moody's expectation that TSTT will be able to return revenue growth from FYE March 2023 onwards, as well as improve and maintain its EBITDA margin to the mid- to high-30s in percentage terms, while maintain adequate liquidity.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSTSTT's B2 ratings could be upgraded if the company returns to steady revenue growth, with a sustained EBITDA margin in the high 30s and reduces its leverage (that is adjusted gross debt/EBITDA) below 4.0 times on a sustainable basis. An upgrade of Trinidad and Tobago's rating and higher support assumption could also result in an upgrade, if the company's credit metrics show an improving trend.TSTT's B2 ratings could be downgraded if TSTT is unable to return to sustained revenue growth and sustain profitability. Ongoing negative free cash flow, a weakening in its liquidity or leverage maintained above 5.5 times could also trigger a downgrade. A downgrade of Trinidad and Tobago's rating, weaker support assumption or a change in TSTT's ownership which would result in the government of Trinidad and Tobago having a smaller stake in TSTT could also result in a downgrade of TSTT's ratings.The methodologies used in these ratings were Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.TSTT is a government-owned telecommunications company and a leading provider of communications services in Trinidad & Tobago, including wireless, fixed voice, fixed internet, pay TV and B2B. The company generated revenue of TTD1,953 million ($285 million) for the 12 months that ended on December 31, 2021. TSTT is 51% owned by National Enterprises Limited (NEL), which, in turn, is 66% owned by the Government of Trinidad & Tobago, and 49% owned by Cable and Wireless (West Indies) Limited. NEL is an investment holding company that operates on behalf of the government and holds shares in select state enterprises.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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