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Rating Action:

Moody's affirms Ufinet LatAm's B2 CFR; outlook stable

02 Jul 2020

Madrid, July 02, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) of Zacapa S.a r.l. (Zacapa), the parent and 100% owner of Ufinet LatAm, S.L.U. (Ufinet LatAm), a carrier-neutral fiber network provider operating in Latin America. Concurrently, Moody's has also affirmed the B2 ratings of the USD600 million senior secured Term Loan B due 2025 and USD93.5 million senior secured revolving credit facility due 2023, both borrowed by Zacapa. The outlook is stable.

"The B2 rating reflects the company's position as Latin America's leading independent fiber network operator, and its high revenue visibility and growth underpinned by consistently rising data traffic in its countries of operation," says Agustin Alberti, a Moody's Vice President -- Senior Analyst and lead analyst for Ufinet LatAm.

"However, Ufinet LatAm is weakly positioned in the rating category, due to its higher leverage relative to our expectations, and negative free cash flow generation, which leaves limited room for operating underperformance, large debt funded acquisitions or shareholder distributions," adds Mr. Alberti.

A full list of affected ratings can be found at the end of this Press Release.

RATINGS RATIONALE

The rating reflects (1) Ufinet LatAm's good market position as the region's largest independent, carrier-neutral fiber network operator; (2) an extensive, owned, comparatively new fiber network; (3) the high revenue visibility, of at least three years, underpinned by a large contracted revenue backlog and medium- to long-term customer contracts with historically high renewal rates; (4) its revenue growth and profit margin, which are higher than those of its international peers; and (5) the benefits of having ENEL S.p.A. (Enel, Baa2 positive) as shareholder, with a 21% stake in the company, and a call option to acquire 100% of the equity from December 2020.

The rating also reflects (1) its relatively small scale in terms of revenue; (2) its high leverage of gross Debt/EBITDA of around 6.0x (pro forma Moody's adjusted as of year end 2019); (3) the high customer concentration; (4) the foreign-exchange risk arising from the volatility of some of its operating currencies (in particular, the Colombian peso), while its debt is denominated in US dollars; (5) the company's ongoing high capital spending, which leads to sustained negative free cash flow generation, offset by the fact that a large percentage of its capital spending is success-based and discretionary; and (6) the event risk of further re-leveraging because of inorganic growth opportunities.

In 2020, Moody's expects Ufinet LatAm to report a sound operating performance in line with historical levels, with revenue and EBITDA growth of around 10% and 15% respectively, benefitting from secular growth in data traffic across the region and new contracts linked to its capex investments. The company will be able to achieve this growth despite the negative impact from the global economic recession affecting the corporate retail division (10% of total EBITDA) and from the depreciation of the Colombian peso (30% of revenues are denominated in Colombian pesos).

The rating agency expects free cash flow to improve in 2020 on the back of strong EBITDA growth and lower financial costs owing to the recent repricing of its Term Loan B, but to remain negative at around USD20-25 million as the company maintains high levels of success-based capital spending of approximately USD70 million per annum (31% of sales in 2020).

In 2019, the company's Moody's-adjusted gross leverage on a pro forma basis stood at around 6.0x, higher than the rating agency's expectation, positioning the company at the weaker end of the B2 category. Leverage was higher than expected partly because the company made two debt financed acquisitions in 2019: (1) 60% of Brazilian provider Netell for $21 million ($41 million including put option and contingent liabilities) and (2) 80% of Reytell for $17.5 million ($31.6 million including put option and contingent liabilities). These acquisitions will allow Ufinet LatAm to enter the Brazilian market, the largest telecoms market in the region, and to strengthen its presence in Honduras.

Moody's expects this leverage ratio to decrease to around 5.5x in 2020 and 5.0x in 2021 on the back of strong revenue and EBITDA growth. However, the company's strategy of expansion through debt financed acquisitions could slow down its path of deleveraging.

Ufinet LatAm is currently 79% owned by funds managed by Cinven, and 21% by Enel. Enel has a put option to acquire 100% of Ufinet LatAm's equity between 31 December 2020 and 31 December 2021 for around USD1.5 billion. Enel benefits from board representation and voting rights equal to Cinven's, establishing a co-control governance structure. Moody's notes that the presence of Enel in Ufinet LatAm's shareholding structure reduces the risk that Cinven would relever Ufinet LatAm to fund shareholder distributions or make credit-dilutive acquisitions because such events would adversely affect Enel.

LIQUIDITY

Ufinet LatAm has adequate liquidity, supported by its relatively small cash balance of $23 million and $76 million availability under the $93.5 million revolving credit facility (RCF) as of year end 2019. The RCF has a springing leverage maintenance covenant of 8.6x net debt/consolidated EBITDA should more than 35% of it be drawn.

STRUCTURAL CONSIDERATIONS

The B2 rating assigned to the $600 million senior secured Term Loan B due 2025 and to the $93.5 million RCF due 2023 reflects the security package these instruments benefit from as well as their first-priority ranking in the company's capital structure alongside other secured liabilities, such as trade payables. The senior secured facilities are guaranteed by a group of guarantor subsidiaries representing no less than 90% of Ufinet LatAm's assets and EBITDA generation. Ufinet LatAm's B2-PD probability of default rating reflects the use of a 50% family recovery rate, reflecting its covenant-lite all bank-loan capital structure.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects the company's visible, growing earnings stream and the supportive secular industry trends underpinned by consistently rising data traffic. Although Ufinet LatAm is weakly positioned in the rating category, the stable outlook is premised on the expectation that the company will progressively reduce leverage over the next 12-18 months towards 5x supported by EBITDA growth, while free cash flow generation improves trending towards break even levels.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the rating is weakly positioned in the category, upward ratings movement is unlikely over the near term. However, the ratings could develop upward pressure if: (1) Ufinet LatAm's gross leverage (Moody's-adjusted) were sustainably below 4.0x; and (2) free cash flow were sustainably positive.

Conversely, the ratings could develop downward pressure if: (1) Ufinet LatAm were to not progressively deleverage over 2020-2022 period such that gross leverage (Moody's-adjusted) remains sustainably above 5.0x; (2) the company generates negative free cash flow on a sustained basis; or (3) liquidity deteriorates.

LIST OF AFFECTED RATINGS

..Issuer: Zacapa S.a r.l.

Affirmations:

....Probability of Default Rating, Affirmed B2-PD

....Corporate Family Rating, Affirmed B2

....Backed Senior Secured Bank Credit Facilities, Affirmed B2

Outlook Action:

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Communications Infrastructure Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1076924. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Zacapa S.a r.l. (Zacapa) is the parent and 100% owner of Ufinet LatAm, S.L.U. (Ufinet LatAm), a carrier-neutral fiber network provider operating in 17 Latin American countries. The company offers leased infrastructure (dark fiber), transmission services (lit fiber), rights of way management, and business-to-business cloud and managed services primarily to international telecom operators in the Americas. In 2019, Ufinet LatAm reported revenue of $233 million and company-adjusted EBITDA of around $114 million.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Agustin Alberti
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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