Fitch Affirms Oi's Ratings at 'BBB'; Outlook Revised to Negative
MONTERREY, Mexico -- January 30, 2013
Fitch Ratings has affirmed ratings for Oi, S.A. (Oi) as follows:
--Local Currency Issuer Default Rating (IDR) at 'BBB';
--Foreign Currency IDR at 'BBB';
--National scale rating at 'AAA(bra)';
--BRL1 billion senior notes due 2022 at 'BBB';
--US$1.75 billion senior notes due 2020 at 'BBB';
--US$750 million senior notes due 2019 at 'BBB';
--EUR750 million senior notes due 2017 at 'BBB';
--BRL2.25 billion fifth debenture issuance maturing 2014 & 2020 at 'AAA(bra)';
--BRL1.1 billion senior notes due 2016 at 'BBB'.
Fitch has also affirmed Telemar Norte Leste S.A.'s local and foreign currency
IDRs at 'BBB' and national scale rating at 'AAA(bra)' and simultaneously
withdrawn the ratings. Since the Oi restructuring, all market debt issued by
Telemar was transferred to Oi.
The Rating Outlook is revised to Negative from Stable.
The revision of the Rating Outlook to Negative reflects Fitch's concerns the
company may not meet its financial targets going forward given the current
high leverage and competitive environment. Fitch expects a gradual reduction
in net leverage by 2014 and 2015. Failure to reach net leverage of 2.2x by
2015 or perception by Fitch that the company is not making progress toward
achieving this level due to weak operating results, higher
investments/distributions to shareholders or weak economic conditions are
likely to result in a downgrade. Factors that would support revising the
Rating Outlook to Stable include Oi making firm progress toward reducing
leverage in conjunction with stable operating performance and cash flow
generation or improved operating performance and profitability.
Oi's ratings incorporate its strong market position, business scale, diverse
service platforms, moderate regulatory risk, cash flow generation and a
manageable debt maturity profile. High leverage and intense competition temper
the credit quality. The ratings also take into account the strategic plan put
in place to improve the company's competitive position and operating results,
as well as Fitch's belief that the recent change in the CEO position will not
alter business or financial profile.
Oi's ratings factor in that net leverage should trend to 2.2x by 2015 from the
recent level of 3.0x as of Sept. 30, 2012. Failure to meet this target or
expectation that it will not be achieved would result in a downgrade as
current leverage is high for the rating category. Fitch notes that Oi has some
flexibility to meet the target in the case of a negative event by adjusting
its capex and by selling non-core assets. In addition, any settlement of
claims can result in releasing funds from judicial deposits; however, the
outcome is uncertain. As of Sept. 30, 2012 Oi had BRL11.6 billion in cash in
judicial deposits, and cash flow from the first nine months of 2012 was
affected by a net outflow of BRL1.4 billion to judicial deposits.
Residential Revenues Stabilizing:
Capital expenditures to fund the strategic plan have increased leverage. The
2012-2015 strategic plan is targeted to reduce fixed-line churn, increase
market share in the corporate segment, and support mobile services. Fixed
lines in service continue to decline; however, recent trends in the
residential segment have improved and appear to be stabilizing as broadband
and pay-TV have more than offset revenue losses associated with fixed lines
over the past two quarters, improving residential ARPU. FTTH and the launching
of IPTV services should continue to support residential revenues.
Mobile services growth continues to underpin Oi's revenues. The company
continues to focus on increasing the mix of postpaid users, which supports
ARPU. Mobile data growth should continue supporting revenues and should become
increasingly important in the mobile revenue mix. Fitch believes the corporate
segment offers some potential to grow given Oi's network coverage and presence
across Brazil and its low market share.
Capital expenditures expectation of BRL6 billion and dividend of BRL2 billion
should limit free cash flow during 2013. Network investments for increasing
capacity and coverage for mobile and broadband services should support
revenues in 2014. EBITDA is expected to improve in 2013 when compared to 2012;
however, net leverage is not expected to start declining until 2014.
Liquidity is underpinned by adequate cash balances, generation of cash flow
from operations, access to credit, and a manageable debt maturity profile. In
addition, the company has two committed credit facilities, for US$1 billion
and BRL1.5 billion. For the 12 months ended Sept. 30, 2012, total net debt
leverage was 3.0x and preliminary results for 2012 indicate that net leverage
finished 2012 at 2.8x. As of Sept. 30, 2012, total consolidated debt was
BRL31.8 billion, composed of 16% BNDES debt, 19% financial institutions, 26%
local debentures, 29% international bonds, and the remainder, international
development banks. After hedges, only 2% of total debt has exposure to foreign
currency. Cash balances are sufficient to meet short-term maturities.
Additional information is available at '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:
--'Corporate Rating Methodology' (Aug. 18, 2012);
--'Rating Telecom Companies-Sector Credit Factors' (Aug. 9, 2012);
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities
Within a Corporate Group Structure)' (Aug. 18, 2012);
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
Rating Telecom Companies
Corporate Rating Methodology
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Sergio Rodriguez, CFA
Prol. Alfonso Reyes 2612
Elizabeth Fogerty, +1-212-908-0526 (New York)
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