Fitch Ratings has affirmed Axtel 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 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 translated 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
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Fitch RatingsMedia RelationsElizabeth Fogerty, New YorkTel:
+1-212-908-0526Email: elizabeth.fogerty@fitchratings.comorPrimary
AnalystAlvin Lim, CFADirector+1-312-368-3114Fitch Ratings, Inc.70
West Madison StreetChicago, IL 60602orSecondary AnalystGilberto
Gonzalez, CFAAssociate Director+1-312-368-2310orCommittee
ChairpersonSergio Rodriguez, CFASenior Director+52-81-8399-9100