Fitch Affirms Oi's Ratings at 'BBB'; Outlook Revised to Negative
Fitch Ratings has affirmed ratings for the Brazilian telco, Oi at BBB'. Fitch has also affirmed Telemar Norte Leste's local and foreign currency ratings and simultaneously withdrawn the ratings.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.