Fitch Downgrades Axtel's IDRs to 'RD'; Simultaneously Upgrades IDRs to 'B'
on Debt Exchange
MONTERREY, Mexico -- January 31, 2013
Fitch Ratings has downgraded Axtel, S.A.B. de C.V.'s (Axtel) IDRs as follows:
--Local currency Issuer Default Rating (IDR) to Restricted Default 'RD' from
--Foreign currency IDR to 'RD' from 'C';
--Long Term National Scale Rating to 'RD(mex)' from 'C(mex)'.
Fitch's downgrade reflects the company's announcement of the successful
completion of the exchange offer, which is considered by Fitch as a distressed
debt exchange (DDE). Holders of 51.6% of the US$275 million senior notes due
2017 and 72.5% of US$490 million senior notes due 2019 elected to participate
in the exchange.
These holders will receive US$249 million of new 7% step-up senior secured
notes due 2020, US$22 million of 7% step-up senior secured convertible
dollar-indexed notes due 2020, and US$82.6 million of cash for an early tender
and cash payment. The exchange results in a recovery of approximately 71% of
the principal for holders that elected to tender their old bonds.
Fitch has simultaneously taken various rating actions to reflect Axtel's
post-exchange capital structure and the fundamental outlook of the company:
--Local Currency IDR upgraded to 'B' from 'RD';
--Foreign Currency IDR upgraded to 'B' from 'RD';
--Long Term National Scale rating upgraded to 'BB-(mex)' from RD(mex);
--Senior unsecured old notes due 2019 upgraded to 'B-/RR5' from C/RR4';
--Senior unsecured old notes due 2017 assigned a rating of 'B-/RR5';
--Senior secured new notes due 2020 assigned a rating of 'B+/RR3';
--Senior secured convertible new notes due 2020 assigned a rating of 'B+/RR3'.
Axtel's 'B' IDR ratings reflect the successful debt exchange, which resulted
in a less levered capital structure. Nevertheless, the company still continues
to face a strong competitive environment. After the exchange, Axtel will have
US$580 million of debt, which is mainly composed of US$249 million of senior
secured notes due 2020, US$22 million of senior secured convertible
dollar-indexed notes due 2020 and the outstanding balance of the 2017 and 2019
unsecured notes of US$133 million and US$135 million, respectively. The
exchange will reduce pressure on the company's liquidity position, as debt
service will be reduced and the debt maturity profile extended.
The new secured notes rated at 'B+/RR3' reflect good recovery prospects given
default. These notes will be secured by first priority liens on all capital
stock of subsidiary guarantors and substantially all assets. Securities rated
'RR3' consider good recovery prospects given default and have characteristics
consistent with securities historically recovering 51%-70% of current
principal and related interest. Conversely, the remaining old notes rated
'B-/RR5' will be structurally subordinated to senior debt and the covenants
have been removed. 'RR5' rated securities have characteristics consistent with
securities historically recovering 11%-30% of current principal and related
Company's liquidity position will also improve due to the sale and lease back
of 883 of towers for approximately $250 million. Annual lease payments for
these assets are expected to be approximately US$20 million. The proceeds will
be used to cover the US$83 million cash payment associated with the exchange
and about US$15 million of fees. An addition US$82 million will be used to
prepay a secured syndicated loan of $82 million. The balance will be used for
general corporate purposes. Though this transaction is not expected to
materially change off-balance sheet leverage ratios, the prepayment of the
syndicated loan should improve the financial flexibility of the company, as
the covenants for this loan were pressured. After the exchange and considering
the effect of the sale and leaseback of towers, Axtel's total debt to EBITDA
ratio should improve to 2.7x from 3.7x, while its net debt to EBITDA ratio
will decline to approximate 2.1x. Including lease adjusted debt, Axtel's total
adjusted debt to EBITDAR ratio should decline to 3.6x from 4.2x.
Axtel continues making significant investments in deploying fiber to the home
(FTTH) which should contribute to strengthen its service portfolio with a
bundle offering of high-end broadband to both residential and corporate
customers, as well as Information and Telecommunications Technology (ICT)
services to both users. Considering the new capital structure, Fitch
incorporates that, in the next few years, Axtel's total debt should remain
relatively stable, as the company will fund its capital expenditures with
internal generation, resulting in a minimal FCF generation. Fitch expects that
adjusted debt to EBITDAR ratio to remain around 3.5x during the next three to
A positive rating action is unlikely in the short term given the recent
distressed debt exchange but positive factors to credit quality include
improvement in the operating performance, margins, FCF generation, competitive
environment and competitive position. A negative rating action could be
triggered by poor liquidity or weak operating results as a consequence of
tougher competition or higher leverage related an adverse ruling of contingent
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:
--'Rating Telecoms Companies', Aug. 9, 2012;
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers',
Aug. 14, 2012;
--'National Ratings Criteria', Jan. 19, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
National Ratings Criteria
Rating Telecom Companies
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Fitch Mexico S.A. de C.V.
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