TEXT-Fitch cuts Axtel's IDRs to 'B-'
Aug 24 - Fitch Ratings has downgraded Axtel, S.A.B. de C.V.'s (Axtel) ratings as follows: -Local currency Issuer Default Rating (IDR) to 'B-' from 'B'; -Foreign currency IDR to 'B-' from 'B'; -US$490 million Senior Notes due 2019 to 'B-/RR4' from 'B/RR4'; -Long-Term National Scale rating to 'BB-(mex)' from 'BB+ (mex)'. Fitch has removed the Negative Outlook on the ratings and placed them on Rating Watch Negative. The downgrade of Axtel's ratings reflects the pressure over the company's leverage due to weak operating performance in the first half of 2012 which resulted in leverage increasing above the previous expectation of 3.5x. The Negative Watch will be resolved pending the result of the divestment of non-core assets including the sale and leaseback of the tower. If successful the proceeds will be used primarily for payment of on-balance-sheet debt and to a lesser extent for capital expenditures. While this transaction is not expected to materially change off-balance-sheet leverage ratios, it should improve the liquidity position of the company. This should help the company reduce its debt service as well as improve the on-balance-sheet debt maturity profile. The inability to improve its liquidity position or stabilize operating performance, or a MXN devaluation that results in total debt to EBITDA approaching 4.5x should result in further negative rating actions. 'RR4' rated securities have characteristics consistent with securities historically recovering 31%-50% of current principal and related interest, which indicates average recovery prospects given default. Underperforming Long Distance Continues The decrease in international long distance (ILD) services prices and volume continues to affect revenue and EBITDA generation. Considering actual operational results and the company's indebtedness, mainly denominated in USD, Fitch expects a total debt to EBITDA ratio around 4.0x by year-end. While ILD services are expected to remain under pressure, the company continues making efforts to mitigate the impact to EBITDA generation by adjusting capex requirements. Capex should be close to US$150 million by 2012, down from previous guidance of US$190 million. In addition, the company is exploring options to support its cash position and reduce indebtedness. Syndicated Loan Covenant Renegotiated Axtel has made an amendment to the syndicated loan covenant. The limit in the total debt to EBITDA ratio has been lifted temporarily to 4.25x from 3.5 until mid-2013 and then should gradually trend down to 3.5x by 2014. For this covenant, total debt is calculated by adding hedge gains or losses (most of Axtel currency hedges are interest-only, leaving the principal exposed to the USD) and using thr quarterly average rate of the MXN. Axtel has US$20 million of the backstop facility available to support liquidity, which should be depleted due to the payment of the coupon of the 2017 notes in Aug.1, 2012 and the coupon of the 2019 notes during the third quarter of 2012, totaling approximately US$32.5 million (or about MXN442 million). Liquidity has weakened but is partially offset by a manageable debt maturity profile. As of June 30, 2012, the company registered a cash balance of MXN693 million, down from MNX1,425 million at year-end 2011, compared to short-term maturities of MXN355 million and latest 12-month funds from operations of MXN2,750 million. Total debt of MXN11,923 million is composed of MXN3,758 million in senior notes due 2017 (US$275 million), MXN6,696 in senior notes due 2019 (US$490 million) and MXN1,469 million in the syndicated loan and other financial obligations. If the company manages to reduce debt, cash flow that was used for debt service and payments can be used for capex. Additional information is available 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Rating Telecoms Companies', Aug. 09, 2012; --'Corporate Rating Methodology', Aug. 08, 2012; -- 'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers', Aug. 14, 2012 --'National Ratings Criteria', Jan. 19, 2011. Applicable Criteria and Related Research: National Ratings Criteria Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers Corporate Rating Methodology Rating Telecom Companies
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