August 9, 2012 / 7:21 PM / in 5 years

TEXT-S&P cuts NII Holdings to 'B'

11 Min Read

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.

Related Criteria And Research
     -- U.S. Telecom And Cable Companies' Maturities Are Manageable, But 
Lower-Rated Issuers Face Some Liquidity Challenges, July 23, 2012
     -- U.S. Telecom And Cable Companies, Strongest To Weakest, July 13, 2012
     -- U.S. Telecom And Cable Ratings Should Be Stable Overall During Weak 
Economic Recovery, July 13, 2012
     -- A Matter of Policy: U.S. Telecom Companies Maintain High Dividend 
Payouts, But For How Long?, May 30, 2012
     -- A Matter of Policy: U.S. Cable And Satellite-TV Companies Ratchet Up 
Shareholder Payouts, May 16, 2012
     -- Top 10 Investor Questions: U.S. Telecom and Cable Industries, May 10, 
2012
     -- Assessing The Four-Notch Rating Gap Between The Two U.S. 
Direct-To-Home Satellite Video Operators, May 9, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

Ratings List

Downgraded
                                        To                 From
NII Holdings Inc.
 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.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below