TEXT-S&P cuts Axtel to 'CCC+' from 'B-'

Fri Aug 10, 2012 3:35pm EDT

Overview
     -- Mexico-based telecommunications company Axtel's financial performance 
continued to weaken during second-quarter 2012 and we believe profitability 
will remain under pressure. 
     -- We are lowering our ratings on Axtel to 'CCC+' from 'B-', and the 
recovery rating of '3' on the notes remains unchanged. 
     -- The negative outlook reflects the pressures on the company's liquidity 
as a result of the weakening EBITDA generation due to strong competition.


Rating Action
On Aug. 10, 2012, Standard & Poor's Ratings Services lowered its long-term 
issuer credit and senior unsecured ratings on Axtel S.A.B de C.V. 
to 'CCC+' from 'B-'. The recovery rating of '3' on the notes, indicating the
expectation of meaningful 50%-70% recovery in the event of payment default,
remains unchanged. The outlook is negative.

Rationale
The downgrade reflects our concerns regarding Axtel's liquidity, which we now 
assess as weak, especially its ability to meet its 2013 coupon payments and 
higher-than-expected working capital needs from payments due from government 
and its still high, though decreasing, capital expenditures. The company has 
narrow covenant headroom, which it has already amended. We believe Axtel could 
need another amendment to its revolving credit facility in the near term, if 
EBITDA further deteriorates or if the Mexican peso continues to depreciate.

The downgrade also reflects Axtel's weak financial performance during the 
second quarter of 2012. Top line continues to suffer from lower international 
traffic segment revenues due to pricing pressures from tough competition. The 
outlook on prices and volume for this segment is uncertain and could further 
erode the company's EBITDA. 

The ratings on Axtel reflect its currently highly leveraged financial risk 
profile and vulnerable business risk profile amid very competitive operating 
conditions and dependence on interconnection through Telefonos de Mexico 
S.A.B. de C.V. The ratings also incorporate the company's marginal revenue 
growth and weak liquidity. Axtel's wide reach within Mexico and its flexible, 
advanced network featuring several access technologies are positive factors.

Under our base-case scenario, we expect a mid-single-digit percentage decrease 
in revenues, a 23% drop in EBITDA for 2012, which would cause EBITDA margin to 
fall to 28% at the end of 2012 from 34.1% during first-quarter 2012. For the 
12 months ended June 30, 2012, Axtel posted total debt to EBITDA of 4.1x and 
funds from operations (FFO) to total debt of 24.8%, adjusted for operating 
leases and pensions. We expect these ratios to deteriorate to 4.4x and 15.2% 
by the end of 2012, due to the international traffic segment's woes, the 
devaluation of the Mexican peso, some delays in certain projects, and the 
ongoing phasing out of the Nextel agreement. Although these ratios could 
qualify for an aggressive financial risk profile, the company's weak liquidity 
constrains it. 

Axtel is currently working on several recapitalization alternatives in order 
to have a healthier capital structure and a sustainable growth trend. This 
might include the sale of nonstrategic assets, infusion of fresh capital, or 
joint ventures in the IT business.

Liquidity
Axtel's liquidity is weak under our criteria, which means sources of liquidity 
over uses could result in a significant deficit in the next tree quarters. 
Sources of liquidity consist of about MXN664 million in cash, about MXN260 
million in available revolving credit line--although access to it will be 
limited due to its financial covenants which we believe could be breached in 
the near term--and FFO of more than MXN2 billion in the next 12 months. Cash 
uses are likely to include capital expenditures of about MXN2.1 billion, 
working capital outflows of MXN400 million - MXN450 million, and principal 
payments of about MXN$355 million for 2012. 

The company has expressed its intentions to scale back capital expenditures to 
$150 million for 2012 to preserve cash; however, we believe that this will 
limit its growth and its ability to compete with larger and better capitalized 
peers in the future, pressuring its competitive position.

During the second quarter, the company amended its leverage and interest 
coverage ratios under the syndicated loan facility, giving it additional, but 
narrow, headroom for 2012. For 2013, if the company's EBITDA falls more than 
4% and debt remains at the same levels due to high peso-dollar exchange rate 
volatility, covenant headroom will tighten further, requiring the company 
another amendment to its credit facility. 

Outlook
The negative outlook reflects the pressures on the company's liquidity as a 
result of weaker EBITDA generation, eroded cash flow due to continuing capital 
expenditure requirements and working capital needs, and our concerns that the 
company's EBITDA generation could result in another covenant amendment. We 
could lower the ratings further if the company incurs higher-than-expected 
capital expenditures and working capital requirements that further weaken the 
company's liquidity and/or if industry conditions and increased competition 
result in higher churn and greater pricing pressures that further erode the 
company's EBITDA generation. An upgrade is possible if the company 
successfully implements its recapitalization projects, improving its capital 
structure, liquidity, and its ability to continue investing.

Related Criteria And Research
     -- Key Credit Factors: Business And Financial Risks In The Global 
Telecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Downgraded
                                        To                 From
Axtel S.A.B. de C.V.
 Corporate Credit Rating                CCC+/Negative/--   B-/Negative/--
 Senior Unsecured                       CCC+               B-
   Recovery Rating                      3                  3

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.
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