TEXT-S&P cuts NII Holdings to 'B'
Aug 9 - Overview -- Latin American wireless carrier NII reported weak operating and financial results in the second quarter of 2012 and lowered its guidance for full year 2012. -- We are lowering our corporate credit rating on the company to 'B' from 'B+'. The outlook is stable. -- We are also lowering our senior unsecured debt rating to 'B-' from 'B'. -- The stable outlook reflects our expectation that EBITDA will improve modestly in 2013 from substantially lower levels in 2012 as 3G network expenses moderate and that leverage will be in the low- to mid-5x area. Rating Action On Aug. 9, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Latin American wireless carrier NII Holdings Inc. to 'B' from 'B+'. The outlook is stable. At the same time, we lowered the senior unsecured debt rating to 'B-' from 'B'. The recovery rating on the senior unsecured debt remains '5', indicating our expectation for modest (10%-30%) recovery in the event of payment default.\ Rationale The downgrade of Reston, Va.-based NII follows the company's weak operating and financial results in the second quarter of 2012, which were below our expectations, and its lower guidance for full year 2012. During the quarter, total revenue and EBITDA declined 15% and 56%, respectively, from the prior-year period. Increased competitive pressures, especially in Brazil, and depreciating local currencies caused NII's average revenue per user (ARPU) to fall by over 25% compared to the prior-year period. The Brazilian real and Mexican peso declined 23% and 15%, respectively, from the year-ago period, relative to the U.S. dollar. These factors, coupled with expenses related to the deployment of 3G services in Mexico and Brazil contributed to the sharp decline in EBITDA. NII lowered its revenue and EBITDA guidance for 2012 to $6.1 billion and $1.0 billion, respectively, from $7.1 billion and $1.4 billion. The lower EBITDA guidance, in particular, is below our original base-case forecast of $1.2 billion. As a result, we are revising our financial risk profile assessment to "highly leveraged" from "aggressive," reflecting our expectations that operating lease-adjusted debt to EBITDA will rise above 5x over the next year and that the company will be not generate positive free operating cash flow (FOCF) until 2015, at the earliest. Our forecast assumptions incorporate our view of slowing economic growth in Latin America in 2012 and 2013 caused by the sluggish global economy. Our new base-case scenario also includes the following specific assumptions for NII: -- Revenue falls by over 15% in 2012 due primarily to lower ARPU. We also believe that revenue will decline in the low- to mid-single-digit area in 2013 before it recovers in 2014. While we expect modest subscriber growth in NII's markets as the company launches 3G services, increased competitive pressures and weak local currencies could pressure ARPU. Moreover, we expect competition from larger wireless operators to result in higher churn despite the company's efforts to retain its customer base and implement tighter credit policies. -- The overall EBITDA margin declines to around 17.5% in 2012 from 24% in 2011. We expect some margin improvement thereafter as expenses related to the company's 3G deployment taper off and regulatory initiatives in its key markets result in lower interconnection costs. -- The company maintains a minimum cash balance of around $1 billion, contributing to liquidity which we consider "adequate" even in the face of FOCF deficits. The ratings on NII reflect a "weak" business risk profile and a "highly leveraged" financial risk profile. Key business risk factors include a competitive wireless industry conditions, and exposure to country risk in its key markets, including regulatory, economic, and foreign exchange risks. These factors have contributed to declining ARPU in NII's markets. Moreover, the company faces some technology risk because of its partial dependence on Motorola Inc.'s integrated digital enhanced network (iDEN) technology, which is being phased out over time. Tempering business risk factors include NII's niche business focused on corporate customers, some geographic diversity, and our expectation for continued subscriber growth despite slowing customer additions in the second quarter of 2012. NII's core strategy is to target business customers, which rely on the "push-to-talk" functionality for rapid connections. Its subscribers generally have higher ARPU and lower churn characteristics relative to other Latin American wireless providers, which focus on the prepaid segment. Still, increased priced-based competition as industry conditions mature have resulted in higher churn and lower ARPU, which have hurt NII's financial performance. Operating in developing countries exposes NII to political, regulatory, economic, and foreign exchange risk, the latter of which has contributed to a sharp decline in EBITDA as local currencies depreciate relative to the U.S. dollar. The company generates its revenues in local currencies while approximately 20% of its costs are in U.S. dollars, creating a currency mismatch. More important, material adverse currency movements impair the company's ability to service its debt, about 70% of which is currently denominated in U.S. dollars. Partially mitigating this risk, NII has implemented some foreign currency hedges for expenditures in Brazil and Mexico and is increasing its level of local currency debt relative to U.S. debt. It also maintains over 80% of its cash holdings in U.S. dollars. Given iDEN's data limitations and the growth of 3G wireless services in Latin American markets, NII has been acquiring spectrum in Latin America to deploy its own 3G technology, which offers more capacity for data services and faster broadband speeds, along with push-to-talk capabilities. This will enable the company to target higher end consumers and preserve its existing corporate customer base in Latin America. However, we consider growth prospects in the consumer market highly uncertain, especially as wireless penetration increases. Moreover, NII competes with larger and better capitalized wireless carriers, including America Movil S.A.B. de C.V. and Telefonica S.A. Some of these operators are deploying their own 3G wireless networks and have greater financial resources to capture market share. Liquidity We consider NII's liquidity adequate. Sources of liquidity consist of $2 billion of cash, including about $687 million of cash at the operating subsidiaries, used to fund operations at these entities. Other sources of liquidity are the company's funds from operations, which we expect will be at least $650 million annually. Cash uses are likely to include capital expenditures of about $1.5 billion in 2012 and $1.1 billion in 2013 related to network deployments, payments associated with the acquisition of spectrum licenses in Brazil and Mexico, and debt maturities of $150 million in 2012. In line with our criteria, we expect sources of liquidity to exceed uses by 1.2x and net sources to remain positive, even with a 15% to 20% drop in EBITDA. Liquidity at the parent company depends on its ability to upstream cash from its subsidiaries as well as external funding. The upstreaming of cash has not been hurt by country-specific bank regulations or foreign currency fluctuations except in the Argentina market, where the government has recently put in certain regulations (although we do not believe that this market is critical to NII's overall funding needs). The company generally uses intercompany charges such as management fees and intercompany loans to tax-efficiently upstream cash. Liquidity at the operating companies depends on the generation of free cash flow as well as locally sourced bank credit facilities. The Brazilian, Mexican, and Chilean operating subsidiaries each have U.S. dollar-denominated facilities, consisting of term loans and equipment financing, which it uses to fund those operations. The Mexican and Brazilian facilities have a total leverage, interest coverage, and net worth covenants, which we believe will have sufficient cushion over the next year. Outlook The outlook is stable and reflects our expectation that EBITDA will improve modestly in 2013 from substantially lower levels in 2012 as 3G network expenses moderate and that leverage will be in the low- to mid-5x area. Still, we could lower the rating if competitive pressures accelerate and adverse currency movements result in sharper declines in ARPU and EBITDA, resulting in leverage rising above 6x. These factors could result also in a revision of our business risk assessment to "vulnerable" from "weak." Conversely, we could raise the ratings if the deployment of 3G services in its markets results in churn to improvement and ARPU stabilization such that leverage is in the 4x area or lower on a sustained basis. 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Corporate Credit Rating B/Stable/-- B+/Stable/-- Senior Unsecured B- B Recovery Rating 5 5 NII Capital Corp Senior Unsecured B- B Recovery Rating 5 5 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.