CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'B+/RR3' rating to Axtel, S.A.B. de C.V's (Axtel)'s proposed USD150 million reopening of its senior secured notes due 2020. The proceeds will be used for general corporate purposes, mainly capex. With the proposed reopening, the 2020 notes will have outstanding approximately USD565 million, with USD545 million in senior secured notes and the remainder of senior convertible notes. These notes are secured by first priority liens on all capital stock of subsidiary guarantors and substantially all assets.
The ratings reflect Axtel's improved liquidity by the successful recapitalization during 2013 through debt exchange and tower sales which resulted in lower leverage and extended debt maturities. The company's total net debt decreased to MXN7.3 billion as of June 30, 2014, which compares to MXN10.9 billion at year-end 2012.
Axtel's ratings are tempered by the company's weak cash generation due to high investment to strengthen its enterprise business and to cope with the intense competitive environment. Fitch does not foresee any material improvement in free cash flow generation and the leverage ratio over the medium term.
The stability of the ratings will hinge on Axtel's ability to sustain EBITDA growth from the data and internet revenue growth, mainly from the enterprise sector and fully mitigate pressures on the traditional fixed-voice service. The company improved its EBITDA in 2013 and the first half of 2014 (1H14), and the continued growth should help support its working capital requirement and capex without any significant need for further external financing. Fitch also 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:
Following Axtel's successful recapitalization in 2013, Fitch does not foresee any serious liquidity problem in the short to medium term as the company does not face any sizable debt maturity until 2017. The company's cash balance of MXN795 million as of June 30, 2014 as well as its committed credit facility worth of USD35 million (equivalent to approximately MXN450 million) should provide comfortable support in its liquidity management.
As of June 30, 2014 the company's total debt was MXN8 billion, mainly comprised of MXN659 million and MXN1.3 billion of 2017 and 2019 unsecured notes, respectively, and MXN5.2 billion and MXN270 million of 2020 Secured notes, including convertible notes. Other debt included loans and financial leases. Following the reopening, the total debt will increase to about MXN9.9 billion.
EBITDA Turnaround; Positive Revenue Mix Change
Axtel resumed its EBITDA growth in 2013 and 1H14 from a year ago and this trend is likely to continue over the medium term driven by strong performance in the enterprise/public sector businesses. In addition, the company's focus on fiber-to-the-home (FTTH) with the recent launch of IPTV should enable steady subscriber and revenue growth in the broadband segment, while protecting existing residential customers. These segments should fully offset the ongoing revenue contraction in the traditional fixed-voice service, which has been tempered by competition and price pressure.
Axtel's ongoing revenue mix change is positive with an increasing proportion from the enterprise segment, which has a stable demand outlook. The mass-market segment, where the competitive pressure remains high, now only represents about 30% of the total revenues. This will allow more stable cash generation from operations going forward. In 2013 and 1H14, Axtel generated EBITDA of MXN2.8 billion and MXN1.4 billion, respectively, which were 10% and 4% growth from a year ago, respectively. EBITDA margins are likely to trend down below 25%, however, as the proportion of higher gross margin businesses, mainly traditional fixed-voice services, will continue to fall.
Weak Cash Generation to Continue:
Fitch forecasts continued negative free cash flow generation over the medium term due to high capex. As the enterprise business represents Axtel's key growth area, the investments for infrastructure and equipment to support the business will remain high in 2H14 and 2015, about MXN2.8 billion per year which is higher than the 2013 level of MXN2.1 billion accounting for about 25% of total revenues. In addition, working capital requirement will continue to increase with a higher volume of business with the public entities, placing some pressure on cash flow from operations (CFFO). However, Fitch does not expect Axtel to need any further significant external financing as the proceeds from the proposed notes issuance, its CFFO, cash on hand, and credit facility should be able to cover it.
Relatively Stable Leverage:
Axtel's financial leverage is forecast to remain stable over the medium term with the adjusted leverage ratio slightly over 4.0x. The net debt level is likely to increase modestly due to negative FCF but it should be compensated by EBITDA improvement. As of June 30, 2014, total adjusted net debt to EBITDAR improved to 3.8x from 4.8x at end-2012, reflecting significant gross debt reduction from the recapitalization. This ratio is likely to reach around 4.2x following the proposed bond issuance. Excluding the off-balance sheet adjustment for rental expenses, the company's total net debt to EBITDA improved to 2.5x from 4.3x at end-2012 during the same period.
The 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 unsecured notes rated 'B-/RR5' are structurally subordinated to senior debt. 'RR5' rated securities have characteristics consistent with securities historically recovering 11% - 30% of current principal and related interest.
A negative rating action could be considered in case of deterioration in liquidity, or weak performance due to competitive pressure leading to persistent negative FCF generation and higher leverage.
A positive rating action is unlikely in the short term given the recent distressed debt exchange. However, positive factors to credit quality include improvement in the operating performance, margins, cash generation, and competitive position.
Fitch currently rate Axtel as follows:
--Foreign and Local Currency Issuer Default Ratings 'B'/Outlook Stable;
--National Long-term Ratings 'BB-(mex)'/Outlook Stable;
--Senior secured notes due 2020 'B+/RR3';
--Senior secured convertible notes due 2020 'B+/RR3';
--Senior unsecured notes due 2019 'B-/RR5';
--Senior unsecured notes due 2017 'B-/RR5'.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', May 28, 2014;
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' Nov. 20, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers