Fitch Affirms Alestra's IDRs at 'BB-'; Outlook Stable
Fitch Ratings has affirmed Alestra, S. de R.L. de C.V.'s (Alestra) ratings as follows:
--Local currency Issuer Default Rating (IDR) at 'BB-;
--Foreign currency IDR at 'BB-';
-Senior Notes due 2014 at'BB-'.
The Rating Outlook is Stable.
Alestra's ratings reflect the strategy of offering value added services (VAS) to the corporate segment which results in lower business risk and stable cash flow generation. The stability and predictability of their operating cash flow is supported by a broad base of corporate clients with contracts averaging three years and customer base life averaging nine years. Also, the ratings incorporate the company's sound financial profile that mitigates the expected revenue loss related with the AT&T Global Network (AGN) agreement. The ratings are tempered by the currency mismatch between debt and cash flows and a strong competitive environment.
Strategy Focusing On Value Added Services:
The focus on corporate customers along with the development of value added services in the IT services and software technology subsectors allows Alestra to increase service penetration within their existing corporate customers. Alestra has a broad base of customers participating in different industries with long and middle term contracts that provides stability to their operating generation and helps to maintain low business risk. The company operates in a strong competitive environment that is partially mitigated by the company's focus on services of some technology subsectors to the corporate segment, where competition is less intense than the residential telecommunications market.
Fitch expects that over the next few years VAS should continue growing primarily driven by information technology (IT) solutions and managed networks. Among these services, growth from system integration services, cloud services network security, unified communications and Ethernet services are expected to become increasingly important to revenues, EBITDA generation and EBITDA margins. Due to this EBITDA is expected to moderately increase during the next few years as the mix of better margin services continues to grow as a proportion of consolidated revenues. Fitch estimates that for the 12 months ended Sept. 30, 2012, approximately 80% of revenues and 85% of gross profit was generated by value added services.
Stable Operating Performance:
Alestra has managed to absorb the expected revenue loss from the termination of the AGN agreement with positive operating results. In addition, revenue loss from the termination of this agreement has been at a slower pace than expected. The increase of value added services along with revenues from the lease of infrastructure to AGNS Mexico, an AT&T subsidiary, has helped compensate expected lower EBITDA generation due to the termination of the AGN agreement with AT&T and lower LD revenues. Revenues from AGNS Mexico is estimated to account for approximately 17% of revenues of Alestra as of September 2012.
For the 12 months ended Sept. 30, 2012, revenue was lower by 0.4% over the same period of 2011 but EBITDA generation, of MXN1,740 million was 10% higher over the same period, for a EBITDA margin of 37.3% (33.9% in Sept. 30, 2011 LTM). These results are explained by a mix of services with higher contribution margins.
Expected Moderate Leverage:
The rating considers a moderate leverage of total debt to EBITDA to be below 2.5x over the long term. The favorable EBITDA generation has contributed to reduced leverage. For the 12 months ended Sept. 30, 2012 total debt to EBITDA and EBITDA to interest expense were 1.7x and 4.8x, respectively. Fitch expects Alestra to end 2012 with a total debt to EBITDA and EBITDA to interest expense of 1.7x and 4.8x, respectively. A sustained leverage metric above 2.5x over time would negatively affect credit quality and could result in a downgrade.
As of Sept. 30, 2012, total debt amounted to US$200 million senior notes due 2014. Alestra is exposed to currency mismatch between debt and cash flow, a sustained MXN devaluation could pressure credit metrics. The ratings also factor that free cash flow (FCF) generation can be limited by the increase in Capex. The company has some flexibility in their Capex to the extent that approximately 70% is success based. Alestra has available USD55 million in committed credit facilities that further support their liquidity position.
MTR Agreement Positive for Alestra:
Alestra reach an agreement regarding the fixed-to-mobile interconnection rates applicable for 2011, 2012, 2013 and 2014 and which are lower than the rates from prior periods and positively impact interconnection cost for Alestra. Also a positive result of the controversy concerning termination rates of long distance calls could have a positive impact on Alestra cash position. Since 2009, the company constituted a trust where they deposit the amounts under dispute of interconnection rates until a final decision is made by the court. As of June 2012, trust balance was MXN416.5 million registered as restricted cash of Alestra.
Key Rating Drivers
Leverage increasing over 2.5x due to lower operating results, inability to refinance in advance of the 2014 maturity and debt-funded projects or acquisitions combined with negative FCF could all result in a negative rating action. Positive factors to credit quality include increased FCF generation and the expectation of a sustained leverage ratio below 1.5x (without refinancing risk).
Additional information is available www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Telecoms Companies', Aug. 9, 2012;
--'Corporate Rating Methodology', Aug. 8, 2012.
Applicable Criteria and Related Research:
Rating Telecom Companies
Corporate Rating Methodology
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