Fitch Affirms Brazil's Oi's Ratings at 'BBB'; Outlook Stable
Fitch Ratings has affirmed the debt ratings of Brazil's Tele Norte Leste Participacoes (TNE) and its subsidiaries, collectively referred to as Oi at BBB with some exceptions at AAA(bra) and said that the outlook is stable.
Fitch said that Oi's ratings incorporate its strong market position, business scale, diverse service platforms, moderate regulatory risk, solid cash flow generation and a manageable debt maturity profile.
The ratings also reflect an intense competitive environment that has resulted in modest operating results and a long-term expectation that net debt to EBITDA should remain around 1.7 times (x). Under Fitch's approach for rating entities within a corporate group structure, ratings of TNE, TMAR and BTM are equalized and viewed on a consolidated basis as the linkage between subsidiaries is considered strong. These companies have operational and strategic ties and historically have been cross defaults and debt guarantees from the parent.
Fitch views the proposed corporate reorganization of TNE and its subsidiaries as positive, as it will simplify the ownership structure and will strengthen its financial profile despite the cash disbursements at the end of the transaction. The resulting entity will have full ownership of the cash flows of the operating companies, including BTM, which prior to the transaction it only had 49%. Fitch expects that the unconsolidated capital structures of the resulting entities should tend to converge in the medium term as BTM has lower leverage than TMAR.
Under the corporate reorganization plan, which is expected to close during the first half of this year, TMAR shares will be exchanged for shares of Coari Participacoes S.A.(Coari) and TMAR will become a subsidiary of Coari. At the same time, Coari and TNE will merge into BTM. Coari and TNE should cease to exist and TMAR, holder of the concession, will remain a 100% subsidiary of BTM. Telemar Particiacoes S.A. will remain the controlling shareholder of the resulting entity, BTM which will be renamed Oi, S.A. Prior to the merger, BTM will distribute a BRL1.5 billion dividend of which BRL761 million should go to minority shareholders and the rest will go to Coari. In addition, the company will need to disburse an estimated BRL1.75 billion -BRL2.25 billion for withdrawal rights to shareholders of TMAR and Coari that do not approve or elect not to participate in the share exchange.
Cash flow generation remains solid, despite strong competitive environment that has resulted in lower revenues. Growth in mobile and broadband services has not been sufficient to compensate for fixed services revenue declines. For the twelve months ended on Sept. 30, 2011, net revenues and EBITDA reached BRL28.2 billion and BRL9.3 billion, respectively. EBITDA margin has declined, even when adding back non recurrent items, and is expected to continue under pressure. Cash flow from operations (CFO) of BRL7.9 billion has been sufficient to meet capital expenditures of BRL4.8 billion and dividends payments of BRL634 million, resulting in positive free cash flow of BRL2.4 billion.
Liquidity is underpinned by high cash balances, strong cash generation, access to credit and a manageable debt maturity profile. For the twelve months ended Sept. 30, 2011 total debt to EBITDA and net debt to EBITDA were 3.0 times (x) and 1.7x, respectively which is in line with Fitch's expectations. Proforma the corporate reorganization, assuming a full participation of the share exchange and considering the twelve months ended Sept. 30, 2011, Fitch estimates that Oi S.A. unconsolidated total debt to EBITDA and net debt to EBITDA should be 2.4x and 0.7x, respectively. Conversely, TMAR unconsolidated total debt to EBITDA and net debt to EBITDA for this same period should be 3.2 and 2.2x, respectively. Fitch expects the unconsolidated leverage of Oi S.A. and TMAR to converge in the medium term.
Total net debt to EBITDA should remain close to 1.7x over the long term. As of Sept. 30, 2011, total consolidated debt at TNE was BRL27.6 billion; composed of 22% of the debt by BNDES, 18% by financial institutions, 22% local debentures, 25% international bonds and 13% international development banks. After hedges, only 2% of total debt will have exposure to foreign currency; similar to FX exposure by other incumbent peers in the region. Of total debt and cash, BRL5.6/BRL4.7 billion is allocated at BTM, BRL20.2/6.3 billion at TMAR and BRL1.8/0.5 billion at TNE with indebtedness having an average cost of 95% of the CDI rate.
Key Rating Drivers:
Factors that can trigger a negative rating action include leveraged acquisitions, a substantial increase in capital expenditures or deteriorating cash flow generation that turns out in a material change in the company's capital structure that results in a sustained increase in net leverage beyond 1.7x over time. Positive factors to credit quality include growing cash flow from mobile services in Sao Paulo, geographical diversification abroad Brazil and lower leverage levels over time.