Globe Telecom, Inc.’s Proposed Fixed Rate Bonds Rated PRS Aaa
11:02 PM
Vernon Joseph Go
Philippine Rating Services Corporation (PhilRatings) has assigned a PRS Aaa rating to Globe Telecom, Inc’s (Globe) proposed issuance of a principal amount of up to P15.0 billion in fixed-rate bonds, of which Globe is preparing to offer an initial tranche of P10.0 billion. Depending on market conditions and other factors, Globe may issue an additional tranche of debt securities with a principal amount of up to P5 billion. PhilRatings has thus issued its rating to cover both tranches and a total aggregate principal amount of up to P15.0 billion.
“Obligations rated PRS Aaa are of the highest quality with minimal credit risk. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.”
The rating assigned reflects the following key considerations: strong, though moderated earnings given keener competition; the company’s well-managed capital structure; strong cash flow generation and adequate liquidity position, strong shareholder support; and the proactive stance of management in addressing the need for improved network quality and reliability.
PhilRatings’ ratings are based on available information and projections at the time that the rating review is on-going. PhilRatings shall continuously monitor developments relating to Globe and may change the rating at any time, should circumstances warrant a change.
In 2011, consolidated revenues, excluding non-recurring income, amounted to P72.44 billion, 8.73% higher compared to last year’s level. This was achieved on the back of robust service revenues which reached an unprecedented P67.81 billion, up by 8.40% from last year’s P62.56 billion. Strong take-up for Globe’s customizable postpaid plans and mobile browsing services, and competitive offers catering to prepaid subscribers allowed the company to register a 7% increase in mobile service revenues to P53.95 billion, several times higher than the estimated 1% industry growth. Revenues from the fixed-line and broadband segment, on the other hand, posted a healthy 15% increase to P13.86 billion. Consolidated revenues were further pushed up by the 25.39% hike in non-service revenues which stemmed from the higher sales of handsets and Tattoo Broadband sticks. Net income was generally flat but remained strong at P9.83 billion as the 11.48% increase in total cost and expenses to P58.66 billion tempered revenue growth. Factors which contributed to the higher cost and expenses were higher marketing expenses needed to support aggressive acquisition campaigns, network-related expansion activities, and depreciation and amortization expenses which were pushed up by the accelerated depreciation related to a network change-out.
After dropping by 18.66% to P27.15 billion in 2010, cash flows from operations posted a 10% growth to P29.93 billion in 2011 due to non-cash adjustments and working capital changes. Net of capital expenditures which amounted to P17.4 billion, operating cash flows were still sufficient to service maturing debt. Capital expenditures in 2011 were mostly for the expansion of Globe’s wireless and broadband networks.
Debt to equity ratio improved to 1.01 in 2011 due to the reduction in debt level combined with a slight rise in equity. This was well within the 2.1 debt to equity limit dictated by the company’s debt covenants, providing Globe with enough flexibility in terms of obtaining additional borrowing.
Going forward, the bulk of revenues will continue to come from the mobile segment although the broadband business is expected to likewise contribute significantly in terms of percentage growth. Accelerated depreciation of assets that need to be decommissioned in relation to the network modernization will affect the company’s bottom line in the next two years. As these charges are non-cash items, however, the company’s cash generating ability will remain strong and will provide more than ample coverage of maturing debt. Although the issuance of the proposed bonds (which will be used to finance capital expenditures) will increase the company’s leverage, Globe’s capital structure is seen to remain manageable.
To improve network reliability, meet larger volume demands, as well as increase the quality of service, Globe will be undertaking a mobile network modernization program over the next two to three years. While a significant amount is being allotted for the project, this is expected to enhance customer loyalty as the company will be able to provide improved services. Globe will also be initiating a comprehensive re-engineering of its IT systems over the next two years. With these two projects, the company expects to generate savings in operating expenses amounting to US$180 million and capital expenditures amounting to US$210 million dollars over the next five years, in addition to the potential revenue contributions from such expanded capacity.
Earlier this year, Globe settled its rated P5 billion fixed-rate bonds (P1.974 billion three-year bonds due in 2012 and P3.026 billion five-year bonds due in 2014). Such was financed by a combination of internally generated funds and the issuance of long-term loans.
