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Global Credit Research - 27 May 2010
Approximately USD765 million of debt instruments affected.
Mexico City, May 27, 2010 -- Moody's Investors Service downgraded Axtel, S.A.B.
de C.V. (Axtel)'s corporate family rating to B2 from
Ba3 given expectations that adverse competitive environment will continue
to place pressure on the company's operating margins and financial
profile and that there is limited prospects of Axtel's free cash
flow turning positive in the medium term. The ratings outlook is
negative . These actions conclude the ratings review which started
on May 7, 2010.
The following issues were affected by Moody's action:
- USD275 million of 7.625% Senior Unsecured Global
Notes due 2017: Downgraded to B2 from Ba3
- USD490 million of 9% Senior Unsecured Global Notes due
2019: Downgraded to B2 from Ba3
The ratings outlook is negative.
Axtel reported significantly weaker than expected performance in the first
quarter of 2010 across virtually all of its business segments.
Even the traditionally robust segments, such as data services and
integrated telecommunications services, experienced a decline in
revenue. In addition, as anticipated, the high margin
business from Nextel Mexico continued to migrate to its own platform during
the quarter. While churn rates have been improving somewhat,
the decline in revenues suggest the competitive pressure continues to
intensify for the company.
On top of the global trend of fixed-to-mobile migration,
competition in the telecom industry in Mexico has intensified in the last
couple of years as cable companies started offering telephony services
to their residential video customers, while Axtel does not provide
video currently. In addition, incumbent Telmex (A3,
stable) has been aggressive in protecting its customer base, both
residential and business, placing pressure on competitors to reduce
prices and improve service quality. Moody's believes that
this tough competitive environment will continue at least in the medium
term given the high probability that the large diversified media company
Televisa (Baa1, stable) will continue to strengthen its telecom
offerings by adding mobile telephony to its current portfolio of DTH,
cable TV, broadband access and fixed telephony services.
While Axtel's current liquidity position remains adequate given its large
cash balance, the persistence of negative free cash flow,
in part due to the high capex requirements, would jeopardize Axtel's
liquidity should operating performance not improve dramatically.
Axtel's ratings do not assume any significant cash drain derived from
the final legal decisions about current disputes with Telmex and the mobile
operators on interconnection rates.
Axtel's B2 ratings reflect the company's small revenue size and negative
free cash flow generation. In addition, the ratings reflect
the operating challenges arising from strong competition from incumbent
Telmex and cable TV operators as well as ongoing wireless substitution.
Balancing these credit negatives is Axtel's solid EBITDA margin and management's
largely prudent financial policies.
Going forward, if Axtel's revenues and operating margins do
not improve meaningfully, the company's ability to invest
in growth capex will be affected. Although the company could incur
some additional debt as permitted under its bond indentures (incurrence
financial covenant of maximum 4 times debt to EBITDA), leverage
would increase to above management's target levels (of maximum 3
The negative outlook is based on Moody's view that, if a rapid operating
turnaround is not achieved, Axtel's liquidity could suffer,
impacting its credit risk.
To the extent that Axtel is successful at increasing revenues and margins
to the point that free cash flow generation becomes sustainably positive
and interest coverage metrics improve, its ratings outlook could
be stabilized. Conversely, should revenue growth and margins
flatten out or decrease further, its ratings could undergo additional
negative rating actions. Specific factors that could trigger a
ratings downgrade include liquidity erosion derived from weak operating
results and further negative free cash flow generation. Moody's
will continue to closely monitor the company's interest coverage ratio,
as measured by EBITDA minus capex to interest expense, and debt/EBITDA
ratio. An underperformance of the company's business or a major
acquisition/capital investment that drive adjusted debt/EBITDA above 3.5
times for an extended period of time would also put negative pressure
on Axtel's ratings.
For further detail on Axtel's, Telmex or Televisa's
ratings, please refer to the latest Credit Opinion on these issuers,
available at moodys.com.
Before today's action, last action on Axtel's ratings was on May
7, 2010 when Moody's placed Axtel's ratings on review for
The principal methodology used in rating Axtel was Moody's Global Telecommunications
Industry (December 2007, document #106465), which can
be found at www.moodys.com in the Rating Methodologies sub-directory,
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory.
Based in Monterrey, Mexico, Axtel is a competitive local telephone
company providing bundled products including voice, data and Internet
services to business and residential users within Mexico. Axtel
provides telecommunications services using a suite of technologies including
FWA, WiMAX, copper, fiber-optic, point
to multipoint radios and traditional point to point microwave access,
among others. Axtel is the second-largest fixed line telecom
in Mexico with about 8% revenues market share as of March 2010.
At present, Axtel serves 39 cities. During the last twelve
months ended in March 31, 2010, the company's revenues
reached USD811 million with a 38% adjusted EBITDA margin.
Nymia C. Almeida
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Moody's downgrades Axtel's ratings to B2. The outlook is negative.
Corporate Finance Group
Moody's Investors Service
No Related Data.
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