Fitch Affirms Globe Telecom at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency)
Fitch Ratings-Hong Kong-26 May 2020:
Fitch Ratings has affirmed Philippines-based Globe Telecom, Inc.'s Long-Term
Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB-'. The agency
has also affirmed the senior unsecured rating at 'BBB-'. The Outlook is
Stable.

Globe's ratings reflect its solid market position as the second-largest
operator in the Philippines' telecom duopoly and its moderate net leverage. We
expect Globe's moderate rating headroom to be sufficient to withstand the
negative revenue impact from the coronavirus pandemic, and forecast its
leverage - measured as FFO net leverage - to remain under 3.3x, the level
above which Fitch would consider negative rating action, which underscores our
Stable Outlook.
Key Rating Drivers
Impact from Coronavirus: Fitch forecasts Globe's 2020 revenue to decline by a
low-single digit percentage (2019: 10% growth) as the pandemic-induced
economic recession will weaken mobile revenues and corporate spending.
However, we expect revenue to return to mid-single-digit growth in 2021. The
higher demand for home broadband services should help ease pressure on
revenue, although the pace of recovery would hinge on the resurgence in mobile
revenues.

Globe's revenue will be harder hit if measures to contain the spread of
COVD-19, such as the Enhanced Community Quarantine, are prolonged. Globe's
1Q20 service revenue grew by a slower pace of 2% yoy (1Q19: 13%) on lower
subscriber acquisition and prepaid top-ups, despite incorporating only two
weeks of the quarantine, which was implemented in mid-March 2020.

Delay in Cash Collection: We also forecast a longer cash collection cycle due
to Globe extending the payment period by 60 days for postpaid customers.
Although it is a temporary relief measure, we expect Globe to continue to take
a more lenient approach towards credit terms through end-2020 in light of the
recession, but will start to tighten consumer credit in 2021. Fitch forecasts
the Philippines' economy to contract by 1% in 2020, before growing by 7% in
2021.

Higher Leverage; Negative FCF: We forecast Globe's FFO net leverage to worsen
to 2.5x-2.7x (2019: 1.9x) in 2020-2021 as we expect cash flow from operations
to be insufficient to fund high capex and dividend commitments. This is
despite our forecast that 2020 capex will fall to around PHP50 billion, from
the original PHP63 billion budget, due to physical construction constraints
and supply chain disruption. Also, we expect the dividend payout ratio to be
at the lower end of 60%-75% of the previous year's core profit as management
aims to preserve cash to weather the economic downturn.

We expect capex/revenue to increase to 36%-38% in 2021-2022 (2019 and 2020
estimate: 31%) to expand data capacity and coverage. We believe additional
investment may be needed should Globe decide to accelerate the expansion of
its mobile e-commerce business through 46% owned associate company, Mynt.
GCash, the mobile wallet brand under Mynt, is likely to expand its user base
more quickly as people may switch to using digital transactions while under
quarantine. We expect Globe to increase its investments in Mynt as it expands
aggressively.

Fixed-Wireless Strategy: Globe's wireless approach provides a cost-effective
solution to cover the Philippine archipelago and address its fixed-line
network limitations, including last-mile constraints and the lengthy
regulatory approval process. Globe's fixed-wireless subscribers rose by 51% to
1.6 million by end-March 2020, and it accounted for 71% of total home
broadband subscribers of over 2.2 million. Globe launched its fixed wireless
service over the faster, more advanced 5G network in Metro Manila in June
2019, targeting home-broadband users in areas where fibre networks are
undeveloped.

Delay in Entry of Competitor: Fitch expects competition in the Philippine
telecom market to remain stable over the next 12 months, with the commercial
launch of a third telco, Dito Telecommunity, likely to take place no earlier
than 1H21 given the pandemic. Dito received its telco licence in July 2019
after a six-month delay in obtaining approval from the regulator.

It will take time for the new entrant to build comprehensive mobile coverage
and a customer base, but the coronavirus containment measures are likely to
delay the rollout of network infrastructure due to labour shortage and supply
chain issues. There is no mandatory ruling for infrastructure-sharing in the
Philippines, although a tower-sharing framework may be introduced for new
tower builds.

Margin Dilution: Globe's adjusted EBITDA is likely to decline to 44%-45% of
total revenue in 2020-2021 (2019: 47%), higher than our forecast of low-40%
for PLDT Inc. (BBB/Stable), because lower-margin fixed line services account
for a smaller part of revenue. Nevertheless, structural revenue decreases from
legacy services - including SMS, international and mobile voice to data
services - are likely to dilute margins.

Competition in the mobile sector is greater than in fixed-line. Fitch believes
diversification into the underserved fixed broadband segment will strengthen
the incumbents' advantage against the new entrant amid the proliferation of
video streaming and use of multiple home devices.
Derivation Summary
Globe's ratings are underpinned by its established position as the
second-largest company in the Philippines' duopoly telecom market, and its
moderate forecast net leverage of 2.5x-2.7x. However, domestic peer PLDT has
wider service diversification, supported by a stronger fixed-line offering,
providing it with a firmer cushion against pricing pressure from mobile
services, particularly with the threat of a new telecom operator.

Globe's regional peer, Indian telco Bharti Airtel Limited (BBB-/Stable), is
also rated at the same level for revenue diversity, but Bharti's leverage
threshold, measured by FFO adjusted net leverage, is tighter at 2.5x due to
intense competition in India. The credit profile of Thailand's third-largest
mobile operator, Total Access Communication Public Company Limited (DTAC,
BBB/Negative, standalone credit profile: bbb-), is comparable with that of
Globe due to similar revenue size. Globe's higher financial leverage is offset
by its stronger business profile, underpinned by a better market position and
service diversification. DTAC's ratings incorporate a one-notch uplift from
linkages with its parent, Telenor ASA of Norway, which has strong board and
management control of DTAC.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Revenue to decline by low-single digits in 2020, and to increase by
mid-single digits in 2021 and thereafter

- Pre-IFRS 16 lease-adjusted EBITDA margin of 44%-45% in 2020-2021

- Higher working capital requirements in 2020 as Globe takes a more lenient
approach to credit terms

- Capex to be around PHP50 billion in 2020 due to project delays, and around
PHP65 billion thereafter

- Additional investments of PHP3 billion-5 billion needed per year to support
an expanding mobile-commerce business under Mynt

- Dividend payment of 60% of prior year's core net income in 2020 as
management targets to preserve cash, and to rise to 70% thereafter, in line
with the dividend policy of 60%-75%

- No major debt-funded M&A or divestments
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating
action/upgrade:

- Positive rating action may arise from easing in the competitive environment
or lower capex leading to FFO net leverage declining to below 2.3x on a
sustained basis

Factors that could, individually or collectively, lead to negative rating
action/downgrade:

- Debt-funded acquisitions or a sharp deterioration in the company's operating
profile leading to FFO net leverage rising above 3.3x for a sustained period
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a
best-case rating upgrade scenario (defined as the 99th percentile of rating
transitions, measured in a positive direction) of three notches over a
three-year rating horizon; and a worst-case rating downgrade scenario (defined
as the 99th percentile of rating transitions, measured in a negative
direction) of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges from 'AAA'
to 'D'. Best- and worst-case scenario credit ratings are based on historical
performance. For more information about the methodology used to determine
sector-specific best- and worst-case scenario credit ratings, visit
https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: We believe Globe's liquidity is adequate as it is
supported by its strong access to local banks and the retail bond market given
its solid financial and market position, although its unrestricted cash
balance of PHP15 billion as of end-March 2020 is insufficient to finance
short-term maturities of PHP19 billion, and dividends payable of PHP3 billion.

Debt Profile: Globe's total debt of PHP145 billion as of end-March 2020, is
denominated mostly in Philippine pesos, with 19% in US dollars before any
foreign-currency hedges. Only 1% of the loans are exposed to currency risk
after swaps. In addition, about 7% of revenue is denominated in US dollars
(2019: 8%), which provides a natural hedge. Fixed-rate loans comprised 86%
(2019: 85%) of local-currency loans and 57% (2019: 57%) of US dollars loans at
end-March 2020.

Globe amended the debt/EBITDA covenant ratio in both the bond trust indenture
and conditions of its bank loans to 3.5x from 3.0x (1Q20: 2.0x) in 2018. The
ensuing financial flexibility will enable Globe to raise more debt to fund
capex.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The
principal sources of information used in the analysis are described in the
Applicable Criteria.
ESG Considerations The highest level of ESG credit relevance, if present, is a
score of 3. This means ESG issues are credit-neutral or have only a minimal
credit impact on the entity(ies), either due to their nature or to the way in
which they are being managed by the entity(ies). For more information on
Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Globe Telecom, Inc.; Long Term Issuer Default Rating; Affirmed; BBB-; RO:Sta
; Local Currency Long Term Issuer Default Rating; Affirmed; BBB-; RO:Sta
----senior unsecured; Long Term Rating; Affirmed; BBB-

Contacts:
Primary Rating Analyst
Keith Poon, CFA
Associate Director
+852 2263 9996
Fitch (Hong Kong) Limited
19/F Man Yee Building 60-68 Des Voeux Road Central
Hong Kong

Secondary Rating Analyst
Janice Chong, CPA
Director
+65 6796 7241

Committee Chairperson
Steve Durose,
Managing Director
+61 2 8256 0307

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Additional information is available on www.fitchratings.com

Applicable Criteria
Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption
sensitivity) (https://www.fitchratings.com/site/re/10120170)
Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019)
(including rating assumption sensitivity)
(https://www.fitchratings.com/site/re/10090792)
Country-Specific Treatment of Recovery Ratings Rating Criteria (pub. 27 Feb
2020) (https://www.fitchratings.com/site/re/10111386)
Sector Navigators: Addendum to the Corporate Rating Criteria (pub. 01 May
2020) (https://www.fitchratings.com/site/re/10120367)

Applicable Model
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to
criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1
(https://www.fitchratings.com/site/re/973270))

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
(https://www.fitchratings.com/site/dodd-frank-disclosure/10123359)
Solicitation Status
(https://www.fitchratings.com/site/pr/10123359#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10123359#endorsement_status)
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