Approximately USD 200 million in proposed debt instruments affected.
Mexico City, July 27, 2009 -- Moody's Investors Service assigned a provisional (P) B1 Corporate Family
Rating to Alestra, S. de R.L. de C.V.
(Alestra) and to its USD 200 million proposed senior unsecured global
notes due in 2014. The ratings are provisional, meaning that
it is highly likely that the ratings will become final after the notes
are issued into the market.
Proceeds from the proposed global notes will be used to prepay,
in 2009, USD 193 million in global notes due in 2009 and 2010 as
well as for general corporate purposes. The ratings assume that
the terms and conditions of the new notes will be in line with those prevailing
in the indenture of the current outstanding notes.
"The ratings reflect Alestra's small revenue size, a
strong competitive environment, its solid operating margins and
customer base as well as its robust technological platform",
said Nymia Almeida, Moody's senior analyst. The ratings
outlook is stable. Alestra's small revenue size, relative
to the telecommunications market in Mexico, weighs down the ratings;
the company's small size is illustrated by its small market share
of 11% of the Mexican value-added services (VAS) market
and 1.6% of the Mexican total telecom market (excluding
pay TV), as of 2008. In addition, because Alestra operates
only in large Mexican cities, the company has limited geographic
and business diversity, which increases the risk of abrupt revenue
losses in a business downturn and reduces its ability to absorb a temporary
disruption or an unexpectedly low return on its capital investments.
Alestra's transformation over the course of this decade from a provider
of primarily long distance (LD) telecom services to a provider of primarily
VAS telecom services supports the ratings. The company's
move stemmed from pressure on global long distance voice providers,
as excess capacity and competition from mobile, fixed line and broadband
services dramatically reduced the profitability of LD services.
As a result, Alestra has substantially increased its focus on VAS
offerings, such as Virtual Private Networks, Internet,
data hosting, IP telephony and network security. In 1999,
LD represented 93% of sales and most of EBITDA; today,
LD represents 30% of revenues and 17% of EBITDA.
This move was positive since sale of bundled VAS boosted the company's
adjusted EBITDA margin from 24% in 2004 to 30% in 2005,
with stable margins thereafter. In addition, the VAS market
has solid growth prospects going forward due to increasing demand for
data services, which should be supportive of Alestra's revenue
growth and margins. For instance, in 2008 and so far in 2009,
Alestra's VAS revenues grew by 12% and 15%,
Alestra's operating cash flow growth is dependent on overall market
growth and on its ability to take market share from Telmex and Axtel.
Telmex (rated A3, Stable) had sales of USD 9.4 billion during
last twelve months ended in June 30, 2009, while Axtel (rated
Ba2, Stable) posted sales of USD 880 million in the same period.
Because telecom operators in Mexico are focusing their marketing efforts
on data services and away from voice services, competition in Alestra's
core VAS market is and will continue to be stiff in the foreseeable future,
placing negative pressure on Alestra's revenues and margins.
However, Moody's believes that the company's relationship
with AT&T and its robust technological platform somewhat mitigate
competition risk. Alestra benefits from its end-to-end
network infrastructure, with over 60% of revenues generated
on-net. The company owns 3,120 miles of optical fiber,
53 point-to-multi point base stations in the 10.5
GHz spectrum and 3,000+ wireless last mile accesses in 7,
15 and 23 GHz. To date, the company's has invested
USD 1 billion in its network.
In addition, a strong customer base, formed mostly of medium
and large corporates and high-end residential customers,
has supported and should continue to support Alestra's stable and
solid EBITDA margins. The strength of its customer base is evidenced
by a healthy collection profile and the long-term nature of the
vast majority of its sales contracts. Margins also reflect a more
profitable product mix, increasingly dependent on VAS as opposed
to LD. Moody's believes that Alestra's margins could
improve slightly in the medium term if management is able to realize expected
savings from its new capital investments. In addition, interconnection
costs could decrease further when i) pending decisions from Mexican legal
instances on injunctions about tariffs to fixed line and mobile operators
are implemented and ii) the dominant state-owned electricity generation
utility, CFE, starts offering fiber network for rental.
However, foreign exchange risk is a constraint to Alestra's
ratings: the company largely relies on its revenues to provide a
natural hedge for foreign currency denominated obligations. However,
Alestra demonstrated limited ability to increase revenues during late
2008 and early 2009 after a significant devaluation of the Mexican peso.
Pro-forma for the new notes, almost all of the company's
debt will be in foreign currency, while 30% of revenues are
in foreign currency. The company has pursued a financial hedging
strategy in the past to cover 12 months of foreign currency debt service,
but does not currently maintain any financial hedges.
Moody's adjusts Alestra's debt to include operating leases
as debt and to exclude effects from foreign exchange fluctuations,
both of which are Moody's standard adjustments. Since 2006,
Alestra's adjusted debt leverage has fluctuated around a moderate
level of about 2.5 times EBITDA. Going forward and pro-forma
for the proposed notes, Moody's expects that leverage should
remain stable at close to 3 times.
From 2004 to 2007, Alestra's free cash flow (FCF) generation
had been positive at an average of 12% of total debt. However,
higher capex in 2008, aimed at increasing the number of direct accesses
as well as improving and expanding its network, reduced FCF generation
to 5% of debt. Going forward, however, Moody's
expects that Alestra will maintain capex at an average of 16% of
revenues, which is considered adequate but should result in limited
FCF until 2011. This increases the likelihood that the proposed
5-year notes will need to be refinanced at maturity.
In June 2005, Alestra signed a Cooperation Agreement with AT&T,
which expires in June 2010. This is not an exclusivity agreement
but describes the working relationship with the local subsidiaries of
AT&T's multinational customers. Alestra is AT&T's
service provider of choice in Mexico. As of today, about
20% of Alestra's total revenues come from AT&T's
multinational customers with operations in Mexico. Because of this
agreement, Alestra has a profitable and seamless relationship with
AT&T for operation, billing, cross-payments and
cross-selling. The agreement renewal process started on
June 10, 2009 and Moody's expects it to be completed by year-end.
Alestra's liquidity is adequate pro-forma for the proposed
USD 200 million note issuance. Going forward to the end of 2010,
Alestra should be able to use EBITDA, cash and proceeds from the
proposed notes to repay the 2010 notes, fund capex and fulfill cash
obligations such as interest payments, working capital and taxes.
In its assessment of Alestra's liquidity, Moody's assumes
that the company will continue to refrain from distributing dividends
to its shareholders in the medium term and manage its capital expenditures
program to maintain sufficient liquidity. The company has substantial
headroom under its current debt leverage covenant (incurrence).
As is generally the practice for non-financial corporates in Latin
America, Alestra does not maintain committed revolving credit facilities.
In 2002, Alestra defaulted in its USD 569.7 million global
notes due 2002, which in 2003 were restructured with a 15%
loss to bondholders.
Because of weak economic fundamentals in Mexico in 2009 and 2010,
the stable outlook on Alestra's ratings is based on Moody's expectations
that the company's revenues will at least remain stable and operating
margins will not experience significant deterioration, with both
supported by relatively stable demand from the company's enterprise
portfolio. Alestra's resilience is supported by i) its strong
customer base focused on the business segment; ii) the long-term
nature of its sales contracts; and iii) relatively inelastic business
enterprise demand for telecom services, although Alestra may be
forced to lower prices in some cases.
The ratings or outlook could be upgraded if Alestra shows solid revenue
growth and stable margins, such that adjusted leverage falls back
to below 2.5 times (close to 3 times as of LTM ending June 2009,
pro-forma for the new notes) and free cash flow generation vis-à-vis
debt burden reaches 10%.
The ratings or outlook could be downgraded if weak economic fundamentals
in Mexico have a greater than expected impact on Alestra's revenues
or margins. Quantitatively, downward pressure would likely
result from negative free cash flow of above 10%, causing
leverage to increase above 3.5 times.
The last rating action on Alestra was on October 3, 2007,
when Moody's upgraded Alestra's ratings to B2 from Ca, which
were subsequently withdrawn due to business reasons.
The principal methodology used in rating Alestra was that for Moody's
Global Telecommunications Industry, published in December 2007.
The methodology can be found at www.moodys.com in the Credit
Policy & Methodologies directory, in the Ratings Methodologies
subdirectory. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Credit Policy & Methodologies directory.
Alestra, which started operations in 1996, is a local Mexican
telecommunications company providing bundled products including voice,
data and Internet services. The company is owned 49% by
AT&T Telecom Mexico, Inc., a wholly owned subsidiary
of AT&T Inc. and 51% by Alfa, S.A.B.
de C.V., a major Mexican conglomerate. Alestra's
business strategy is focused on offering VAS to its business clients.
In addition, Alestra provides wholesale communications services
to cable TV and other telecom carriers. Other important customer
segments are government entities and offices, call centers and hotel
chains. The company also has a legacy base of high-income
residential customers with internet access and local telephony services,
which total about 10% of the company's revenues. During
the last twelve months ending on June 30, 2009, Alestra's
revenues and adjusted EBITDA amounted to USD 389 million and USD 131million,
Nymia C. Almeida
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Moody's assigned a (P) B1 rating to Alestra and its proposed global notes. The ratings outlook is stable.
Alexander I. Carpenter
Senior Vice President - Regional Credit Officer
Corporate Finance Group
Moody's America Latina Ltda.