Fitch Upgrades Axtel to 'BB-' on Alestra Merger; Outlook Stable

miércoles 17 de febrero de 2016 16:32 GYT
 

(The following statement was released by the rating agency) CHICAGO, February 17 (Fitch) Fitch Ratings has upgraded Axtel S.A.B. de C.V.'s (Axtel) long-term foreign-currency and local-currency Issuer Default Ratings (IDRs) to 'BB-' from 'B'. Fitch has also removed the IDRs from Rating Watch Positive and assigned them a Stable Rating Outlook. These rating actions follow the closing of Axtel's merger with Alestra S. de R.L. de C.V. (Alestra). A full list of rating actions follows below. The upgrade reflects Axtel's improved operational competitiveness and market position and enhanced capital structure following the merger with Alestra, a Mexican fixed-line telecom operator and a wholly owned subsidiary of Alfa S.A.B. de C.V. (Alfa), rated 'BBB-'/Outlook Stable by Fitch. Alfa is one of the largest business groups in Mexico with leading market positions across various industries, including petrochemical, automotive components, and processed foods. Through the merger, Alfa will own 51% of Axtel, and Alestra will become a subsidiary of Axtel. The merger became effective on Feb. 15, 2016. As part of the merger conditions, all of Axtel's existing USD senior unsecured and secured notes, a total of which amounted to USD701 million at end-2015, will be refinanced with bank loans. Fitch estimates that the refinancing will lower the company's annual interest expenses by about USD40 million. Positive Merger Synergies: The upgrade reflects the enhanced credit profile of the merged entity through an economy of scale and operational synergies, mainly in terms of network competitiveness and improved efficiencies, as well as a stronger market presence in the enterprise business segment in Mexico. Based on the operating result of each entity in 2015, the company will become the third largest fixed-line service provider with revenues and EBITDA of MXN16.3 billion and MXN5.8 billion, respectively, which compare to Axtel's stand-alone figure of MXN10.1 billion and 3.2 billion. Its small scale of operation and market shares against the backdrop of an intense competitive landscape, however, will still remain a key credit concern. Axtel expects to achieve operational synergies of MXN1 billion a year (equivalent to USD60 million) over the medium term, which would represent close to a 20% improvement from the current combined EBITDA level. The company also expects to save about USD20 million on annual capex through reduced network maintenance costs and integrated network management. Good Strategic Fit: Alestra's enterprise-customer-focused operation is positive for Axtel's business profile as the enterprise segment is subject to less fierce competition compared to residential segments. This is also in line with Axtel's recent growth strategy, which has been centered more on the corporate clients, including government, as demand for traditional fixed-voice service is declining. Fitch believes that the growth outlook for the enterprise segment is more positive than the overall Mexican telecom market given the increasing demand for IT and data management service, which is in line with the global trend. This enterprise-segment-focused business strategy has helped fuel both companies' EBITDA growth in recent years. Axtel has improved its EBITDA by 24% during 2012-2015, with its margin improving to 31.1% from 24.9%. Similarly, Alestra has maintained a solid growth track record, with its revenues and EBITDA growing by 33% and 46%, respectively, during the same period. Enhanced Financial Profile: The merged entity's financial profile will be materially stronger than Axtel's stand-alone level, given Alestra's low leverage, and Fitch's forecast for positive FCF generation over the medium term. At end-2015, Axtel's net leverage ratio was 3.3x, while that of Alestra was 1.4x. Based on the current financial profile of each entity without reflecting any synergy benefit, the merged entity's consolidated net leverage would be 2.4x. Including the off-balance-sheet debt related with network lease expenses, the adjusted net leverage ratio of the merged entity is estimated to be 3.0x, which compares to Axtel's stand-alone 4.0x at end-2015. Fitch forecasts this ratio to gradually fall toward 2.5x over the medium to long term, backed by positive FCF generation amid continued EBITDA expansion, which is considered moderate for a 'BB' category considering the company's market position. Strong Parent: Axtel's credit quality will also benefit from becoming part of a strong business group in Alfa. While Fitch does not foresee any explicit legal or financial support from Alfa, Axtel should enjoy better access to capital markets/financial institutions when in need of external financing given the group's strong reputation and entrenched business position in the country, as already evidenced by its USD750 million credit agreement to refinance the existing notes. This should help strengthen Axtel's financial flexibility. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Axtel include: --Low-to-mid single digits revenue growth over the medium term --Operational synergies to boost Axtel's EBITDA margin to 36-37% over the medium term, compared to the company's stand-alone 31% in 2015 --Capex to hover at around MXN4 billion over the medium term --USD50 million of annual dividends assumed from 2017 --Positive FCF generation over the medium term enabling gradual adjusted-net-leverage reduction toward 2.5x RATING SENSITIVITIES Continued negative FCF generation due to competitive pressures and dampened demand under unfavourable economic conditions, resulting in its adjusted net leverage, including network lease expense adjustments, increasing to above 3.5x on a sustained basis could result in a negative rating action. Conversely, Successful business integration and continued solid growth in the enterprise business segment, resulting in consistent positive FCF generation with improved adjusted net leverage toward 2.0x on a sustained basis could result in a positive rating action. LIQUIDITY Axtel's liquidity profile is sound as the company will not face any material debt maturity as all of its senior notes will be refinanced with the bank loans, of which USD250 million will become due in 2019. The combined cash balance of Axtel and Alestra was over USD190 million. Fitch does not foresee any liquidity problem for the company based on projected stable operational cash flow generation in the short to medium term. FULL LIST OF RATING ACTIONS Fitch has removed from Rating Watch Positive and upgraded the following ratings: Axtel S.A.B. de C.V. --Long-term foreign-currency IDR to 'BB-' from 'B'; --Long-term local-currency IDR to 'BB-' from 'B'; --National long-term rating to 'A-(mex)' from 'BB-(mex)'; --Senior unsecured notes due 2017 and 2019 to 'BB-' from 'B-/RR5'; --Senior secured notes due 2020 to 'BB-' from 'B+/RR3'. The Rating Outlook is Positive. Contact: Primary Analyst Alvin Lim, CFA Director +1-312-368-3114 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Velia Valdes Analyst +52 81 8399 9100 Committee Chairperson Joe Bormann, CFA Managing Director +1-312-368-3349 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com. 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