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Fitch Affirms Axtel's IDR at 'B'; Outlook StableFitch Ratings has affirmed Axtel (News - Alert) S.A.B. de C.V.'s (Axtel) Long-term Local- and Foreign-Currency Issuer Default Ratings (IDR) at 'B' and 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 Axtel's ratings reflect its sound liquidity position following the successful recapitalization during 2013 via the debt exchange and tower sales which led to improved financial flexibility with extended debt maturities and lower leverage. They also reflect positive impacts from telecom sector reform and the company's high exposure to an enterprise business segment in which the competitive intensity is lower than in a residential market segment. The company's ratings are tempered by its weak market position, continued contraction in fixed-voice revenues, and negative free cash flow (FCF) generation due to high capex. The stability of the ratings will hinge on Axtel's ability to sustain EBITDA growth, which is mainly tied to its data and Internet revenues including enterprise/government solutions, which helps mitigate pressures on the traditional voice services. EBITDA growth in line with that of 2014 and the first quarter of 2015 (1Q15) would be necessary to support its working capital and capex requirements without any significant need for external financing. Good Liquidity: Fitch does not foresee any liquidity problem for Axtel in the short- to medium-term as the company faces no sizable debt maturity until 2017. The company has retained a sound liquidity profile since its debt exchange and sale-and-leaseback of its tower assets during 2013. As of March 31, 2015, Axtel held a cash balance of MXN3.2 billion as well as committed credit facilities of worth USD130 million (equivalent to approximately MXN2 billion), which compare to its short-term debt of just MXN493 million. In March 2015, the company agreed with America Movil to terminate all outstanding legal disputes regarding interconnection rates. As part of the agreement, Axtel received a cash payment of MXN950 million which also helped further bolster its cash position. As of March 31, 2015, the company's total debt amounted to MXN11.7 billion, mainly composed of USD50.4 million (MXN764 million) and USD101.7 million (MXN1.5 billion) of 2017 and 2019 unsecured notes, respectively, and USD565.4 million (MXN8.4 billion) of 2020 secured notes, including convertible notes. Other debt included loans and financial leases. Slow Growth Ahead: Fitch forecasts Axtel's revenue growth to remain weak in 2015, contracting since 3Q14, mainly due to the slower-than-expected IT solution and equipment sales to government entities and on-going voice revenue erosion. The weak growth was also exacerbated by the elimination of domestic long-distance charges from 2015 as a result of the telecom reform. During the last 12 months (LTM) as of March 31, 2015, the company's revenues declined by 8% compared to the same period a year ago. Positively, Axtel's gradual revenue mix change is favorable with an increased exposure to enterprise clients and data-based services, away from traditional fixed-voice service and residential segments, where the competitive pressure remains high. Fitch believes that the long-term demand outlook for enterprise IT services is solid, despite recent slowdown, and the company's focus on fiber-to-the-home (FTTH) with IPTV (News - Alert) should enable steady subscriber and revenue growth in the broadband segment. These segments should fully offset the ongoing revenue contraction in the traditional fixed-voice service over the long term. Axtel's revenue generation from its residential market segment accounted for just 25% during 2014. Positive Reform Impact: The telecom reform measures introduced during 2014 should continue to help Axtel to moderately improve its cost structure and competitiveness. The company stopped paying interconnection fees to America Movil in August 2014, which has translate to higher operating margins and enabled it to fully offset the revenue erosion from the long-distance charge elimination. During 1Q15, Axtel's EBITDA generation improved by close to 8% to MXN783 million from MXN728 million despite revenue contraction. As a result, EBITDA margin during the period was 32.4%, compared to 24.5% a year ago. Negative FCF: Fitch forecasts Axtel to continue negative free cash flow (FCF) generation over the medium term due to high capex, mainly related to the enterprise business segment and FTTH. As these segments represent the company's key growth area, investments for infrastructure and equipment will remain high over the medium term at around MXN2.5 billion, which is slightly lower than the 2014 level of MXN2.8 billion. In addition, working capital requirements could increase with an increasing volume of business, with the public entities, placing some pressure on cash flow from operations (CFFO). Positively, Fitch does not expect Axtel to need any significant external financing as the negative FCF amount is unlikely to be material and could be comfortably covered by its high cash balance. Stable Leverage: Axtel's financial leverage is likely to remain stable over the medium term with adjusted net leverage below 4.0x due to stable EBITDA generation amid a modest increase in net debt level due to negative FCF generation. As of March 31, 2015, the company's adjusted gross and net leverage ratios, including the off-balance-sheet adjustment for rental expenses, were 4.6x and 3.7x, respectively, which compare to 3.8x and 3.5x at end-2013. Excluding the rental expenses, Axtel's net leverage was 2.8x, which was a slight increase from 2.4x at end-2013 partly due to adverse foreign exchange rate movement. In light of the company's operating profile, Fitch believes that Axtel's leverage is moderate for the rating level. Above-Average Recovery Prospects: Axtel's secured notes rated 'B+/RR3' reflect good recovery prospects in the event of default. These notes are secured by first-priority liens on all capital stock of subsidiary guarantors and substantially all assets. Securities rated 'RR3' 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 the senior debt. Securities rated 'RR5' have characteristics consistent with securities historically recovering 11% - 30% of current principal and related interest. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Axtel include: --Modest revenue contraction in 2015 followed by low-single-digit growth from 2016; --EBITDA margins in the range of 28%-29% in 2015 and 2016; --Continued modest negative FCF generation over the medium term due to high capex; --Net leverage to remain below 4.0x over the medium term. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to a negative rating action include: Ratings could be pressured in case of material deterioration in Axtel's liquidity and failure to proactively refinance its debt maturities, and/or weak performance due to competitive pressures and low demand leading to persistent negative FCF generation and higher leverage. Conversely, a positive rating action is unlikely given the recent distressed debt exchange in the absence of any significant improvement in the company's financial profile. Over the long term, positive credit quality factors would include improvement in the key operating metrics and EBITDA generation, positive FCF generation and lower leverage on a sustained basis. LIQUIDITY Axtel's liquidity is sound in light of its high cash balance of MXN3.2 billion as of March 31, 2015 which comfortably covered the short-term debt of MXN493 million. The company also has a USD130 million credit facility and does not face any sizable debt maturity until 2017. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393 National Scale Ratings Criteria (pub. 30 Oct 2013) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082 Additional Disclosures Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985622 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 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 (News - Alert) 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. View source version on businesswire.com: http://www.businesswire.com/news/home/20150529006149/en/ |
