MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions for Alestra, S. de R.L. de C.V.'s (Alestra) Issuer Default Ratings (IDRs) and outstanding debt highlighted below:
-Local currency IDR upgraded to 'BB-' from 'B+';
-Foreign currency IDR upgraded to 'BB-' from 'B+';
-Senior Notes due 2014 affirmed at 'BB-'.
The Rating Outlook is Stable.
The upgrades are supported by Alestra's continued stable operating performance and moderate leverage and the expectation that these will remain stable over the medium term. The rating actions also consider Alestra's manageable debt maturity profile, lower business risk and stable cash flow generation. The ratings incorporate that any potential projects including spectrum bids, last mile network construction or small acquisition should not materially change the company business risk and financial profile. According to Fitch's methodology, Recovery Ratings are not assigned to issues from issuers with an IDR of 'BB-' or higher. Therefore, Fitch affirmed the US$200 million senior notes at 'BB-' from its previous rating of 'BB-/RR3'.
Alestra's ratings reflect its position as a niche service provider, its small scale, advanced network infrastructure, moderate regulatory risk and sound financial profile. The ratings are tempered by the currency mismatch between debt and cash flows, challenges in the long distance market and competition in data, internet and local services (DILS or value added services). Lower business risk has resulted as a consequence of management's strategy to grow DILS. In addition, Alestra's focus on corporate customers provides stability for cash flow as the competitive environment is more balanced than the residential market.
Alestra's long distance strategy centers on offering these services in conjunction with value added services, mainly as part of an integrated solution or bundle offering. While value added services should continue growing in 2011, long distance is expected to continue declining as percentage of total revenues due to business fundamental trends as competition remains strong and price pressures continues.
As a result, EBITDA margins should moderately increase during 2011 as the mix of better margin value added services continues to grow as a proportion of consolidated revenues. Fitch estimates that for year-end 2010, approximately 80% of revenues and 88% of EBITDA was generated by value added services.
Fitch views Alestra's business strategy to grow revenues from its corporate customers by offering value added services as a credit positive in maintaining low business risk and contributing to stable operating performance. For this reason, Alestra is moving to control its network from end to end by investing in its own links rather than leasing them from third parties. By the end of 2010, Fitch anticipates that approximately 57% of the links are leased. Fitch estimates that this strategy should result in having leased less than 50% of the links in the medium term. Fitch expects that over the next few years, Alestra should continue growing and introducing convergent services, such as IP telephony, security, hosting, managed services and VPNs to offer integrated solutions to corporate customers, which accounts for approximately 93% of gross profits. Alestra also looks to underpin its consumer service offering with differentiated services.
Fitch expects total debt to EBITDA to remain below 2.5 times(x) in the long term. While an upgrade seems unlikely in the short term, a sustained leverage above 2.5x over time would negatively affect credit quality and ultimately lead to a downgrade. For the 12 months ended Sept. 30, 2010 total debt to EBITDA and EBITDA to interest expense were 2.1x and 4.3x, respectively. Fitch also expects Alestra to continue generating positive FCF which totaled MXN775 million for this period. Increases in capex over the next few years can limit the company's FCF generation.
Alestra is exposed to currency mismatch between debt and cash flow and has refinancing needs by 2014. However this risk is partially mitigated as approximately 30% of revenues and 40% of EBITDA are denominated in USD. As of Sept. 30, 2010 total debt amounted to US$247 million, composed of a US$10 million bank facility, US$37 million vendor financing and US$200 million senior notes due 2014. Fitch expects that at least part of the 2014 maturity should be refinanced in advance and failure to do so should pressure the ratings.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Global Telecoms Companies' (Sept. 16, 2010);
--'Corporate Rating Methodology' (Aug. 13, 2010).
Applicable Criteria and Related Research:
Rating Global Telecoms Companies - Sector Credit Factors
Corporate Rating Methodology