Reuters logo
Fitch Affirms Axtel at 'BB-'; Outlook Stable
March 16, 2017 / 11:28 PM / in 7 months

Fitch Affirms Axtel at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, March 16 (Fitch) Fitch Ratings has affirmed Axtel S.A.B. de C.V.'s (Axtel) Long-Term Local- and Foreign-Currency Issuer Default Ratings (IDRs) at 'BB-'. Fitch also affirmed the company's National long-term rating at 'A-(mex)'. The Outlook on the IDR and National long-term rating remains Stable. Axtel's ratings reflect the company's improved operational scale and market position in the enterprise business segment following the merger with Alestra in 2016. The company benefits from enhanced financial flexibility as a subsidiary of Alfa S.A.B. de C.V. (Alfa, 'BBB-'/Stable), which is one of the largest business groups in Mexico, with leading market positions across various industries. The ratings are tempered by Axtel's weak financial profile for the rating category, small market positions in Mexico and volatile demand outlook from its government clients, as well as negative FX exposure. KEY RATING DRIVERS Enterprise-driven Growth: Fitch forecasts Axtel to undergo modest low single-digit revenue growth in 2017 and 2018, driven mainly by continued solid growth in the enterprise segment, which represented 65% of its total sales on a pro forma basis in 2016. Fitch believes that the demand outlook for network connectivity and IT solutions for enterprise clients should remain relatively stable in Mexico, in line with the regional trend. Also, the recurring revenue proportion based on multi-year contracts represented 95% of the company's total enterprise revenues in 2016, which should remain relatively stable given the switching cost of service providers. Negatively, Fitch expects revenue contraction in the residential and government segments to continue in 2017. For the residential services, Fitch expects continued subscriber loss for the wireless service until the service discontinuation in 2018, which will dilute the steady growth in its fiber-to-the-home (FTTH) subscribers. The mass market segment revenue is forecast to resume growth from 2019, as FTTH revenues continue solid double-digit growth annually backed by steady expansion in the subscriber base. Demand from government agencies could continue to be volatile given austerity measures amid difficult macro conditions. Any material improvement in contract volumes from the public sector would be challenging, as the discretionary budgets for IT and telecom investments will likely remain constrained. Positive Merger Impact: The impact of Axtel's merger with Alestra has been positive in terms of a strategic fit of Alestra's operations, increased market presence, as well as opex and capex savings. Axtel disclosed that the merger synergy during 2016 was about MXN500 million, with additional MXN500 million headroom to be achieved in 2017 for a total run-rate of MXN1 billion. Synergy benefits have and will continue to come from network-related opex efficiencies and lower corporate expenses, following the integration of operations. In addition, Fitch believes that being a part of a reputable group in Alfa helps Axtel gain better access to banks/capital markets, leading to stronger financial flexibility. Negative FCF to Continue: Fitch forecasts that Axtel's negative FCF generation will remain uncurbed at least for the short term. Fitch projects the company's capital intensity, measured by capex/sales, to remain consistently well above 20% in 2017 and 2018 at around MXN3.4-MXN3.5 billion, which will largely consume the projected CFFO during the period. Annual cash interest payments in 2017 and 2018 should fall by over 50% from the 2016 level of MXN2.4 billion, which was high due to expenses related to the prepayment of Axtel's previous bonds. Fitch does not expect any dividend payments in the short- to medium-term. High Leverage: Axtel's current leverage is weak for the rating level, and its failure to show any signs of leverage improvement in the coming quarters will immediately pressure the ratings. The company's net leverage increased to 4.4x at end-2016 on a pro forma basis, compared to Axtel's pre-merger leverage of 3.8x at end-2015, due mainly to MXN depreciation against the USD, integration costs, as well as continued revenue contraction in its government business. Axtel is negatively exposed to MXN depreciation as about 70% of its total debt is denominated in USD against its MXN-based EBITDA generation. Fitch forecasts a modest leverage reduction over the medium term towards 4.0x as the company's EBITDA gradually improves. Deleveraging could be accelerated should the company successfully divest its 143 mobile towers in 2017, as recently disclosed. While any details on the potential asset disposal is yet to be available, Fitch forecasts the company to potentially garner about USD50 million from the transaction, which should lead to 0.2x net leverage improvement based on Fitch's 2017 EBITDA projection. DERIVATION SUMMARY Axtel's 'BB-' ratings reflect the company's relatively weak financial profile, mainly its high leverage compared to other 'BB' category telecom operators in the region. The company's weak market position and small scale of operations are also negative considerations versus its peers in the rating category; this is somewhat offset by its business concentration in the enterprise segment which faces less competition than the residential segment. Parent/subsidiary linkage exists between Axtel and Alfa, given the latter's 51% ownership in the company. However, the ratings are based on Axtel's stand-alone credit profile given weak legal and strategic linkages. No country ceiling constraint and operating environment influence were in effect for the ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Low- to single-digit revenue growth on a pro forma basis in the short- to medium-term, mainly led by enterprise segment; - WiMax service to be discontinued from mid-2018; - Modest EBITDA margin improvement to 33% in 2017; - Capex to represent 22%-23% of sales over the medium term; - Adjusted net leverage to gradually fall toward 4.0x over the medium term. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Strong revenue growth backed by continued solid growth in the enterprise and the FTTH business, with stable demand from the government segment --Positive FCF generation to strengthen its cash position --Improved adjusted net leverage to comfortably below 3.5x on a sustained basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Unfavorable economic conditions negatively affecting IT/telecom budgets of the corporate and public segments --Uncurbed negative FCF generation --Further depreciation of MXN against the USD --Failure to improve adjusted net leverage toward 4.0x on a sustained basis, from the current level of 4.4x. LIQUIDITY Adequate Liquidity: Axtel's liquidity profile is adequate. The company's cash balance was MXN1,447 million at end-2016, which comfortably covered its short-term debt of MXN895 million. The company will not face sizable bullet maturities until 2019, when MXN10.3 billion of bank loans become due. Axtel expects to boost its liquidity position with the planned tower sales. While the company does not have any committed credit facilities, Fitch believes that Axtel can retain solid financial flexibility in terms of access to domestic financial institutions in Mexico, as a part of Alfa group. FULL LIST OF RATING ACTIONS Axtel S.A.B. de C.V. -- Long-Term Local Currency and Foreign Currency IDR affirmed at 'BB-'/Outlook Stable; -- National long-term rating affirmed at 'A-(mex)'/Outlook Stable. Contact: Primary Analyst Alvin Lim, CFA Director +1 312 368 3114 70 W Madison St Chicago, IL 60602 Secondary Analyst Velia Valdes Associate Director +52 81 8399 9100 Committee Chairperson Joe Bormann, CFA Managing Director +1 312 368 3349 Date of Relevant Rating Committee: March 15, 2017 Additional information is available on www.fitchratings.com. Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020692 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
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