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Fitch Affirms Axtel at 'BB-'; Outlook Stable
March 16, 2017 / 11:28 PM / 9 months ago

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 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on 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. 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