TEXT - Fitch takes rating actions on Axtel S.A.B. de C.V.

Thu Jan 31, 2013 2:34pm EST

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.
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.