MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed Axtel S.A. B. de C.V's (Axtel) local and foreign currency Issuer Default Ratings (IDR) at 'B' and affirmed the Long-term National Scale Rating at 'BB-(mex)'. The Rating Outlook is Stable.
Fitch has also affirmed the following ratings:
--Senior secured notes due 2020 at 'B+/RR3';
--Senior secured convertible notes due 2020 at 'B+/RR3'.
--Senior unsecured notes due 2019 at 'B-/RR5';
--Senior unsecured notes due 2017 at 'B-/RR5'.
KEY RATING DRIVERS
The rating actions reflects a better liquidity position after the debt exchange which resulted in lower leverage and a capital structure with more flexibility to service debt and an extended maturity profile. In addition, the liquidity position was enhanced by the sale and lease back of 883 of towers which proceeds, approximately US$250 million, were used to cover the costs of debt exchange, prepayment of the syndicated loan and company's cash balance. While the sale and leaseback of towers improved the liquidity position, leverage adjusted for off-balance sheet liabilities remains relatively the same.
Axtel ratings are limited by the company's weak operational performance, demanding investment plans which, while it should contribute to strengthen its service portfolio and address the strong competitive environment, limits FCF generation as the company will fund its investments from internal generation. Fitch is not expecting the company to deleverage in the next few years and sees refinancing risk from the maturity in 2017.
The stability of the rating depends on the ability of the company to sustain its EBITDA, which is tied to how quickly the company is able retain both residential and corporate customers and achieve further data and internet revenues that could offset declining voice revenues and prices pressures. Also a negative rating action could be triggered by an adverse ruling of contingent liabilities estimated at US$270 million. Fitch views the passage of a new telecommunications law in Mexico to have some positive effects to Axtel's operation in the medium term.
Improved Liquidity Position:
The company's liquidity position was strengthened by debt exchange and sale and lease back of towers. These two transactions helped Axtel reduce its debt service, extended its maturity profile and improved its financial flexibility. Previous to this, the syndicated loan covenants were putting pressure on the company's financial profile. As of March 31, 2013 Axtel's indebtedness amounted to US$577 million, mainly composed of US$249 million of senior secured notes due 2020, US$22 million of senior secured convertible dollar-indexed notes due 2020 and the outstanding balance of the 2017 and 2019 unsecured notes of US$133 million and US$135 million, respectively. The company received US$249 million from the sale and lease back of towers. Proceeds were used for the cash payment associated with the debt exchange, to prepay a secured syndicated loan and to increase cash balances.
Weak Operational Performance
The company seeks to strengthen the profitability of its operation with an ambitious expense savings program, a more aggressive customer retention strategy for the residential segment, and higher EBITDA generation from the corporate segment which will partially compensate intense competition in the residential market. During the first quarter of 2013, revenues continued to decline due to lower prices and lines in service; however, gross margins improved to 76% and EBITDA margin reached 29% (excluding non-recurring profits from asset sales). For the next two years EBITDA generation will be tied to the company's ability to retain customers and to offer a more competitive service offering to both residential and corporate customers.
Axtel continues to strengthen its service portfolio with the recent launch of a video offer for the residential segment and the deployment of fiber to the home (FTTH) in new cities. This enables Axtel to provide a bundle triple play offering to high-end residential customers. Fitch anticipates that Axtel will focus on regaining commercial agreements with corporate customers as well as providing information and telecommunications technology (ICT) services.
Relatively Stable Leverage
The capital structured is expected to remain stable as the company has limited FCF generation capability due to its demanding investment plan. Any improvement in leverage should come from increased EBITDA generation as indebtedness is expected to remain stable. The debt exchange reduced debt but did not materially change off-balance sheet leverage ratios as the company has to make annual lease payments for towers of approximately US$20 million. For the LTM ended in March 31, 2013 total debt to EBITDA ratio should improve to 2.7x from 4.2x, while its net debt to EBITDA ratio will decline to approximate to 2.4x. Including lease adjusted debt, Axtel's total adjusted debt to EBITDAR was 3.6x from 4.7x. Fitch believes that, in the next few years, Axtel's total debt should remain relatively stable, as the company will fund its capital expenditures with internal generation, resulting in minimal FCF generation. Fitch expects the adjusted debt to EBITDAR ratio to remain around 3.5x during the next three to four years.
The new secured notes rated at 'B+/RR3' reflect good recovery prospects given default. These notes are secured by first priority liens on all capital stock of subsidiary guarantors and substantially all assets. Securities rated 'RR3' are considered good recovery prospects given default and have characteristics consistent with securities historically recovering 51% - 70% of current principal and related interest. Conversely, the remaining old notes rated 'B-/RR5' are structurally subordinated to senior debt and most of the covenants have been removed. 'RR5' rated securities have characteristics consistent with securities historically recovering 11% - 30% of current principal and related interest.
A positive rating action is unlikely in the short term given the recent distressed debt exchange. But positive factors to credit quality include a sustained improvement in the operating performance, margins, FCF generation, competitive environment and competitive position. A negative rating action could be triggered by poor liquidity or weak operating results as a consequence of tougher competition or higher leverage related to an adverse ruling of contingent liabilities.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Telecoms Companies' (Aug. 09, 2012);
--'Corporate Rating Methodology'(Aug. 08, 2012);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Aug. 14, 2012);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Rating Telecom Companies
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
National Ratings Criteria