Fitch Ratings has assigned a 'BB' rating to the up to US$190 million proposed reopening of Axtel's, S.A.B. de C.V. (Axtel) 2019 senior notes. Proceeds from the reopening are expected to be used primarily for refinancing purposes and to a lesser extent for general corporate uses. The 2019 notes rank pari passu with existing 2017 notes and other indebtedness and will be guaranteed by all subsidiaries with the exception of Telecom Networks Inc.
Axtel ratings are supported by its business position as the largest competitive local exchange carrier (CLEC) in Mexico, moderate financial profile, adequate liquidity and the expectation of positive free cash flow in the next few years. The ratings are tempered by increased competition, particularly in the residential market, mobile substitution and modest regulatory risk.
Leverage is expected to remain stable or decline slightly during 2010.
Total debt to EBITDA weakened during 2009 to 2.6 times (x) due to increased indebtedness and lower than expected EBITDA. Incorporated in Axtel ratings is that total debt to EBITDA should be approximately 2.0x over the long term; however, credit quality will be pressured if this ratio does not meet Fitch's 2010 expectation and the company does not show a clear path to lowering the ratio in the short term, which would likely to result in a one notch downgrade.
Liquidity remains adequate, and the debt maturity schedule should improve with the proposed transaction.
As of Dec. 31, 2009 the company registered cash of MXN1,402 million compared to short-term maturities of MXN944 million and the last 12 months of funds from operations of approximately MXN2,909 million. Adjusting for a cash disbursement to Telmex during January 2010, cash is close to MXN1 billion. Pro forma for the bond reopening, Axtel should face US$74 million in maturities over the next three years before it faces the US$275 million maturity in 2017 and US$300 million plus the proposed issuance in 2019. Assuming the proposed transaction is successful, total debt should be composed of US$275 million in senior notes due 2017, up to US$490 million in senior notes due 2019 and US$74 million in other loans and capital leases. Axtel has exchanged the debt service of its 2017 and existing 2019 senior notes to MXNs; however, the principal amount remains exposed to the US Dollar, adding currency risk.
Axtel's solid business position is underpinned by an integrated voice and data offering in 39 cities in Mexico; however, the absence of a pay-tv offering limits its competitive position in the residential segment. Fitch expects Axtel to pursue a pay-tv alternative by the second half of 2010 to enhance its competitiveness in this segment. Fitch takes into account that cash outflows for this project should not be material whether Axtel elects to offer the service on its own or end with an agreement with a direct to home (DTH) provider. Balanced EBITDA generation between the residential and the corporate segment partially compensates for intense competition in the residential market. The ratings continue to incorporate the gradual termination of the agreement with Nextel that should reduce contribution to consolidated revenues from 10.8% in 2008 to about 5% in 2010 and 2% by 2011. Fitch's previous expectation that in the medium term, margin growth from data and local services should compensate for cash flow loss related to Nextel was not completely offset during the second half of 2009, resulting in lower operating results.
The introduction of Wimax services in 2009 helped Axtel to stabilize the negative trend of lines in service (LIS). Fitch expects Axtel to post moderate growth in LIS during 2010. The delay of Wimax introduction during 2008 in conjunction with number portability and the termination of the agreement with Cablemas affected LIS, which in turn resulted in disconnections; however, the company has been able to stabilize and moderately grow its LIS since the second half of 2009. Number portability balance for Axtel has remained neutral since September of 2009.
Fitch believes that a Wimax-based offering should increase Axtel's competitive position within the residential market as it offers broadband services at competitive speeds and VoIP services. In addition, as customers migrate to Wimax, capacity in older access technologies will be released allowing the company to offer voice-only services to users with lower demand for the released capacity. Pay television or 3G projects should not alter credit quality.
Fitch believes it is economically more reasonable for Axtel to offer mobile services through Wimax than deploying a 3G network. Axtel has indicated that if it elects to participate in the 3G spectrum auctions, the necessary funds for this project would be financed with new equity without increasing leverage. Fitch considers that a pay-tv offering will enhance the competitive position in the residential market. Axtel current fixed wireless Wimax service has the potential to develop mobility over the next few years and may eventually lead Axtel to offer mobile services, initially oriented toward data.
Axtel's ratings incorporate a relatively stable operating performance. During 2009, the company posted weaker than expected operating results. Failure to stabilize operating performance should negatively affect credit quality. Free cash flow should be null for 2010, but should turn positive in coming years as capital expenditures stabilize. Potential expansion to new cities seems limited and should not materially affect the cash flow of the company as potential new cities are smaller and less populated than cities where it currently has presence.
Fitch currently rates Axtel as follows:
--Local currency Issuer Default Ratings (IDR) at 'BB';
--Foreign currency IDR at 'BB';
--US$300 million senior notes due 2019 at 'BB';
--National scale rating at 'A+(mex)'.
The Rating Outlook is Stable.
These ratings reflect the application of Fitch's current criteria, which are available at www.fitchratings.com and specifically include the following reports:
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'National Ratings - Methodology Update' (Dec. 18, 2006).
Additional information is available at www.fitchratings.com.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings, New York
Sergio Rodriguez, CFA or Alberto Moreno,
+52(81)8399-9100 (Monterrey)
Media Relations:
Cindy Stoller,
+1-212-908-0526
cindy.stoller@fitchratings.com
