Fitch Affirms PLDT at 'BBB'; Outlook Stable

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

PLDT's ratings reflect its robust market position in both the fixed and
wireless markets in the Philippines. However, the rating headroom is very
limited, as we expect FFO net leverage in 2020 and 2021 to be around 2.8x -
the level at which Fitch would consider negative rating action. Slower growth
amid the coronavirus pandemic, elevated capex and dividend commitments are
likely to widen negative free cash flows (FCF). The pace of deleveraging could
pick up if PLDT decides to dispose of more assets to reduce debt, or if EBITDA
expansion were to be stronger than we expect.
Key Rating Drivers
Impact from Coronavirus The coronavirus pandemic is likely to slow PLDT's
near-term revenue growth, as mobile traffic shifts to home broadband amid
restrictions to contain the spread of COVID-19. We forecast 2020 revenue to
grow by a low- to-mid-single digit percentage (2019: 3%) as slower economic
activity curbs consumer and enterprise spending.

We expect PLDT's wider service diversification and a more entrenched
fixed-line position to help mitigate revenue pressure in its wireless
business, compared to rival Globe Telecom (BBB-/Stable). However, we could
further revise down our revenue forecast if measures to contain the spread of
COVID-19, such as the Enhanced Community Quarantine, are prolonged.

Delay in Cash Conversion Cycle: Fitch forecasts a longer cash collection cycle
due to PLDT extending the payment period by 30 days for postpaid customers and
providing a six-month installment programme. These are temporary relief
measures, but we expect PLDT to continue to take a more lenient approach on
payment collection through end-2020 in light of the recession, and to start to
tighten consumer credit in 2021. Fitch forecasts the Philippines' economy to
contract by 1% in 2020, before growing by 7% in 2021.

Elevated Capex, Negative FCF: We forecast PLDT's FCF to continue to be
negative in 2020-2021, as cash flow from operations will be insufficient to
fund high capex and the dividend commitments of 60% of the previous year's
core income. We forecast 2020 capex to be around PHP63 billion (2019: PHP88
billion) to continue to expand mobile coverage and capacity, and to roll out
of its fixed-broadband network.

PLDT originally guided for PHP83 billion of capex for 2020, but later
indicated that 20%-25% will be deferred to 2021 as the network rollout has
been hampered by labour shortages. PLDT will prioritise spending to maintain
service quality and customer experience, such as network maintenance and
repair. New projects such as the 5G rollout are likely to be postponed, while
business capex, which was originally budgeted at PHP18.5 billion, may also be
reduced. We expect PLDT's capex to be PHP65 billion-78 billion in 2021-2022 to
support growing data traffic and resume 5G development.

Aggressive Fibre Rollout: PLDT's fibre expansion underscores its strategy to
capture growth in the home-broadband and enterprise segments and strengthen
its network ahead of the entry of a third telco in 2021. PLDT's fibre coverage
passed 7.5 million homes by end-March 2020 (1Q19: 6.7 million), with 3.6
million in fibre-port capacity of which 1.1 million fibre ports were available
for sale.

We expect PLDT to continue to expand its fibre footprint once quarantine
restrictions are eased to strengthen its position ahead of the entry of the
new competitor. PLDT allocated PHP18.5 billion as business capex in the
original capex budget - mainly for last-mile connections and customer premises
equipment - though this amount could vary depending on the pace of connections
and upgrades for fibre-broadband services.

Stronger Network Performance: We expect that PLDT's strong network performance
to continue to support its solid market position in both the fixed and
wireless markets. PLDT outperformed Globe in mobile network performance in
terms of user experience, download/upload speed and network latency, according
to Opensignal. PLDT also had the fastest fixed-line network in the Philippines
in 2019, according to research by Ookla. We believe that it is a result of
higher network investment by PLDT in 2018-2019, with its total cash capex 44%
higher than Globe over that period.

Mobile Data as Growth Driver: PLDT's 1Q20 mobile data revenue grew 39% yoy,
driven by an increase in customers' data usage as it promoted LTE upgrades and
engaged customers, such as marketing specific data packages for gaming or
social networking purposes. Its 1Q20 mobile traffic doubled to 636 petabytes
yoy, driven by increased usage of data for video streaming and e-games. The
company increased its LTE/4G base stations to 26,000 (2018: 16,000) to expand
3G and 4G population coverage to 94% by end-March 2020.

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.

Partial Funding via Asset Sales: PLDT will receive the remaining PHP2.8
billion from Metro Pacific Investments Corp. in 2020 for the sale of its
shares in Beacon Electric Asset Holdings Inc., which should help keep FFO net
leverage at around 2.8x. In addition, PLDT is considering the sale of
properties and its remaining stake in Germany's Rocket Internet to help fund
its capex, though we did not consider these in our analysis. PLDT intends to
maintain a long-term net debt/EBITDA ratio of 2.0x.

Robust Market Position: PLDT's ratings are supported by its established
position as the largest integrated telco in the Philippines and it competitive
strength in both fixed and wireless services. It had a revenue market share of
66% in the fixed-line market and 44% in mobile in 2019. PLDT's EBITDA
contribution from the fixed segment was around 39% in 2019 (2018:47%), while
the remaining 61% was from the wireless segment (2018: 53%).
Derivation Summary
PLDT is rated higher than its closest peer, Globe Telecom, Inc. (BBB-/Stable),
due to its robust position in both fixed and wireless markets.

Globe gained revenue share in the mobile segment over the last few years at
the expense of PLDT. Globe's mobile revenue share was 53% in 1Q20 (2019: 56%),
but still trails PLDT at 47% of total telecom revenue share. PLDT's
fibre-broadband strategy offers long-term growth and bundling opportunities,
against the new mobile entrant.

PLDT is also rated a notch higher than India's Bharti Airtel Limited
(BBB-/Stable), despite the latter's better revenue diversity. This is because
the intense competition in India justifies a tighter leverage threshold of
2.5x, in terms of FFO adjusted net leverage, for Bharti at a 'BBB-' rating.

Fixed-broadband operator Telekom Malaysia Berhad (TM, A-/Negative, Standalone
Credit Profile: bbb+) has a leverage profile similar to PLDT, but is in a
better position due to its market dominance and more modest competition in
Malaysia's fixed-broadband market. However, TM's strengths are offset by its
thinner operating EBITDA margins, which are likely to narrow further due to
pressure on broadband tariffs. TM's IDR incorporates a one-notch uplift from
its Standalone Credit Profile due to its links to the Malaysian state.

Thailand's third-largest mobile operator, Total Access Communication Public
Company Limited (DTAC, BBB/Negative, standalone: bbb-) is rated a notch lower
than PLDT on a standalone basis to reflect its weaker market position, lack of
product diversification and a highly competitive Thai mobile market, which
offset its slightly more conservative balance sheet, with leverage of around
2.0x. DTAC's 'BBB' IDR incorporates a one-notch uplift to reflect moderate
linkages with its parent, Telenor ASA of Norway.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Revenue to grow by low- to mid-single digits in 2020 as the strong growth is
interrupted by the impact from the coronavirus pandemic on mobile revenues.
After that, we assume revenue to grow by mid-single digits, in line with the
economic growth of the Philippines

- Pre-IFRS 16 lease-adjusted EBITDA margin to stabilise at 42%-43% (2019: 44%)

- Credit payment extensions to increase cash-collection cycles and working
capital outflows in 2020

- Annual cash capex of PHP63 billion in 2020 (2019: PHP88 billion) as its
infrastructure rollout is constrained by the pandemic. We assume capex to be
PHP65 billion-78 billion in 2021-2022

- PHP2.8 billion proceeds in 2020 for the sale of Beacon shares

- No further capital injection in Voyager except for PHP1 billion in 2020

- Dividend payout of 60% based on previous year's core income, as per the
company's stated policy (2019: 60%)

- No M&A transactions or major 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 2.8x 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: PLDT's unrestricted cash balance of PHP34 billion as of
end-March 2020 and committed undrawn credit facility of PHP17 billion are
sufficient to fully cover its short-term maturities of PHP39 billion. The
company's liquidity is also supported by its strong access to capital markets
and bank loans. Potential divestment of its remaining shares in Rocket
Internet and sale of real-estate assets could add to financial flexibility,
should these materialise. Fixed-rate loans comprised 89% (2019: 88%) of the
total at end-March 2020, after taking into account its long-term interest rate
swap contracts.

Well-Laddered Debt Maturity: PLDT's total on-balance-sheet debt of PHP206
billion as of end-March 2020 is well spread out, with over 70% of debt due
after 2022. Around 7% of debt was in US dollars (1Q19: 12%), and they were
unhedged (1Q19: 7% unhedged). Dollar-linked revenue - from international
long-distance calls, international leased lines and mobile virtual operator
businesses - provide a natural hedge at 17% of PLDT's consolidated service
revenue (1Q19: 15%).
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.

PLDT Inc.; Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta
; Local Currency Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta

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 Hybrids Treatment and Notching Criteria (pub. 11 Nov 2019)
(https://www.fitchratings.com/site/re/10100477)
Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption
sensitivity) (https://www.fitchratings.com/site/re/10120170)
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))

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Dodd-Frank Rating Information Disclosure Form
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Solicitation Status
(https://www.fitchratings.com/site/pr/10123356#solicitation)
Endorsement Status
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