TEXT - Fitch takes rating actions on Axtel S.A.B. de C.V.
Jan 31 - Fitch Ratings has downgraded Axtel, S.A.B. de C.V.'s (Axtel) IDRs as follows: --Local currency Issuer Default Rating (IDR) to Restricted Default 'RD' from 'C'; --Foreign currency IDR to 'RD' from 'C'; --Long Term National Scale Rating to 'RD(mex)' from 'C(mex)'. Fitch's downgrade reflects the company's announcement of the successful completion of the exchange offer, which is considered by Fitch as a distressed debt exchange (DDE). Holders of 51.6% of the US$275 million senior notes due 2017 and 72.5% of US$490 million senior notes due 2019 elected to participate in the exchange. These holders will receive US$249 million of new 7% step-up senior secured notes due 2020, US$22 million of 7% step-up senior secured convertible dollar-indexed notes due 2020, and US$82.6 million of cash for an early tender and cash payment. The exchange results in a recovery of approximately 71% of the principal for holders that elected to tender their old bonds. Fitch has simultaneously taken various rating actions to reflect Axtel's post-exchange capital structure and the fundamental outlook of the company: --Local Currency IDR upgraded to 'B' from 'RD'; --Foreign Currency IDR upgraded to 'B' from 'RD'; --Long Term National Scale rating upgraded to 'BB-(mex)' from RD(mex); --Senior unsecured old notes due 2019 upgraded to 'B-/RR5' from C/RR4'; --Senior unsecured old notes due 2017 assigned a rating of 'B-/RR5'; --Senior secured new notes due 2020 assigned a rating of 'B+/RR3'; --Senior secured convertible new notes due 2020 assigned a rating of 'B+/RR3'. Axtel's 'B' IDR ratings reflect the successful debt exchange, which resulted in a less levered capital structure. Nevertheless, the company still continues to face a strong competitive environment. After the exchange, Axtel will have US$580 million of debt, which is mainly composed of US$249 million of senior secured notes due 2020, US$22 million of senior secured convertible dollar-indexed notes due 2020 and the outstanding balance of the 2017 and 2019 unsecured notes of US$133 million and US$135 million, respectively. The exchange will reduce pressure on the company's liquidity position, as debt service will be reduced and the debt maturity profile extended. The new secured notes rated at 'B+/RR3' reflect good recovery prospects given default. These notes will be secured by first priority liens on all capital stock of subsidiary guarantors and substantially all assets. Securities rated 'RR3' consider good recovery prospects given default and have characteristics consistent with securities historically recovering 51%-70% of current principal and related interest. Conversely, the remaining old notes rated 'B-/RR5' will be structurally subordinated to senior debt and the covenants have been removed. 'RR5' rated securities have characteristics consistent with securities historically recovering 11%-30% of current principal and related interest. Company's liquidity position will also improve due to the sale and lease back of 883 of towers for approximately $250 million. Annual lease payments for these assets are expected to be approximately US$20 million. The proceeds will be used to cover the US$83 million cash payment associated with the exchange and about US$15 million of fees. An addition US$82 million will be used to prepay a secured syndicated loan of $82 million. The balance will be used for general corporate purposes. Though this transaction is not expected to materially change off-balance sheet leverage ratios, the prepayment of the syndicated loan should improve the financial flexibility of the company, as the covenants for this loan were pressured. After the exchange and considering the effect of the sale and leaseback of towers, Axtel's total debt to EBITDA ratio should improve to 2.7x from 3.7x, while its net debt to EBITDA ratio will decline to approximate 2.1x. Including lease adjusted debt, Axtel's total adjusted debt to EBITDAR ratio should decline to 3.6x from 4.2x. Axtel continues making significant investments in deploying fiber to the home (FTTH) which should contribute to strengthen its service portfolio with a bundle offering of high-end broadband to both residential and corporate customers, as well as Information and Telecommunications Technology (ICT) services to both users. Considering the new capital structure, Fitch incorporates that, in the next few years, Axtel's total debt should remain relatively stable, as the company will fund its capital expenditures with internal generation, resulting in a minimal FCF generation. Fitch expects that adjusted debt to EBITDAR ratio to remain around 3.5x during the next three to four years. SENSITIVITY/RATING DRIVERS A positive rating action is unlikely in the short term given the recent distressed debt exchange but positive factors to credit quality include improvement in the operating performance, margins, FCF generation, competitive environment and competitive position. A negative rating action could betriggered by poor liquidity or weak operating results as a consequence of tougher competition or higher leverage related an adverse ruling of contingent liabilities.