NII Holdings Debt Rating Lowered - Outlook Stable

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Standard Poor's Ratings Services has lowered its corporate credit rating on Latin American wireless carrier NII Holdings (Nextel Wireless) to 'B ' from 'B'. The outlook is stable.

­The debt ratings agency said that the downgrade is based on their belief that leverage could temporarily approach 9x in 2013 from about 4.7x as of Sept. 30, 2012 on a rolling-12-month basis. The expected sharp deterioration in credit measures is due to a confluence of factors, including:

  • Delays in deploying a 3G network in NII's markets, primarily in Brazil, which has placed the company at a competitive disadvantage relative to its peers.
  • Lower average revenue per user (ARPU) due to pricing pressure across NII's markets. Additionally, depreciating local currencies could hurt the company's consolidated ARPU, on a U.S.-translated basis, which is problematic, since the company's debt is largely U.S dollars, as are about 20% of its operating expenses;
  • Subscriber losses will continue in Brazil until the company is able to deploy 3G services, which will most likely not occur until the second half of 2013. Our expectation that EBITDA declines at least 20% in 2013 from about $900 million in 2012.
  • The company may issue new debt to partially fund free operating cash flow losses in 2013.
  • While NII's proposed tower sale and leaseback transaction bolsters the company's liquidity, it could also result in higher overall debt balances.

S&P said that the ratings on NII continue to reflect a "weak" business risk profile and a "highly leveraged" financial risk profile. Key business risk factors include a competitive wireless industry conditions, and exposure to country risk in its key markets, including regulatory, economic, and foreign exchange risks. These factors have contributed to declining ARPU in NII's markets. Moreover, the company faces some technology risk because of its partial dependence on Motorola's iDEN technology, which is being phased out over time.

Tempering business risk factors include NII's niche business focused on high ARPU and low churn corporate customers, some geographic diversity, and our expectation for continued--albeit slowing--subscriber growth in 2013. Key factors in S&P's financial risk assessment include expectations for a sharp deterioration in credit measures and ongoing free operating cash flow deficits over the next few years.

The outlook is stable and reflects expectation that operating and financial performance will remain weak in 2013, due primarily to delays in launching a 3G network in Brazil, as well as increased priced-based competition in NII's markets.

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