MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings upgrades the following ratings for Tele Norte Leste Participacoes S.A. (TNE) and its subsidiaries, collectively referred to as Oi as follows:
TNE
--Local currency Issuer Default Rating (IDR) to 'BBB' from
'BBB-';
--Foreign currency IDR to 'BBB' from 'BBB-';
--National
scale rating to 'AAA(bra)' from 'AA+(bra)'.
Telemar Norte Leste S.A. (TMAR)
--Local currency IDR to 'BBB' from
'BBB-';
--Foreign currency IDR to 'BBB' from 'BBB-';
--National
scale rating to 'AAA(bra)' from 'AA+(bra)';
--US$1.75 billion
senior notes due 2020 to 'BBB' from 'BBB-';
--US$750 million senior
notes due 2019 to 'BBB' from 'BBB-;
--EUR750 million senior notes
due 2017 to 'BBB' from 'BBB-;
--BRL2.25 billion fifth debenture
issuance maturing 2015 and 2020 to 'AAA(bra)' from 'AA+(bra)'.
Brasil Telecom S.A. (BTM)
--Local currency IDR to 'BBB' from 'BBB-';
--National
scale rating to 'AAA(bra)' from 'AA+(bra)';
--BRL1.08 billion fifth
debenture issuance due 2013 to 'AAA(bra)' from 'AA+(bra)'.
The Rating Outlook has been revised to Stable from Positive.
The rating upgrades reflect the solid progress made by Oi towards a long term target of net debt-to-EBITDA of 1.7 times (x) and Fitch's expectation that should remain around that level over the long term. While the rating actions are not contingent to the capital increase and Fitch does not expect Oi to raise the entire BRL12 billion, it should help strengthen Oi's balance sheet. The capital increase is part of the alliance with Portugal Telecom (rated 'BBB', Outlook Stable by Fitch).
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. Conversely, the ratings are tempered by an intense competitive environment that has resulted in modest operating results and gross leverage levels which are somewhat high when compared to its Latin-American peers. Under Fitch's approach to 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 strong. In addition to operational and strategic ties, there are cross defaults and debt guarantees from the parent.
Data and Mobile To Compensate for Fixed Services:
Over the next few years, revenue and cash flow growth should come from data and mobile services that are expected to offset weak operating trends in the fixed line services. However, local services from fixed lines are expected to continue to be the main cash flow generator despite mobile and broadband substitution continues to gain presence in usage and local traffic. In Fitch view, the integration of Oi with BTM resulted in an operator with a larger scale and stronger competitive position especially in the mobile and corporate services. Domestic corporate service offerings benefit from the combination of BTM and Oi's networks, which created a country-wide backbone. Mobile services ought to benefit from a nationwide network and the potential for an increased market share in the mobile segment, particularly in region II and the state of Sao Paulo.
Portugal Telecom Agreement, Capital Increase Positive:
Fitch believes the agreement with Portugal Telecom should give Oi some synergies, mainly related with bargaining power with suppliers, in addition to a 10% stake in Portugal Telecom. Furthermore, the capital increases in Telemar Paricipacoes S.A. (TMARPART), TNE and TMAR will result in an improved liquidity position and should better position Oi for future expansion. Oi may rise up to BRL12 billion in capital and is expected to pay around BRL1.75 billion for up to a 10% stake in Portugal Telecom. Given the current market conditions and the terms of the price for the subscription of equity, Fitch incorporates that Oi should raise funds in the neighborhood of BRL4 billion-BRL6 billion which should also be used by TMAR to strengthen its balance sheet and better position it fund its growth strategy in the medium term.
On Jan. 25, 2011, Portugal Telecom and Oi closed the agreement where Portugal Telecom intends to acquire directly and indirectly 22.4% of Oi for approximately BRL8.4 billion. The transaction includes Portugal Telecom acquiring a 35% stake in AG Telecom and L.F. Tel which each owns 19.33% of TMARPART, the controlling entity of TNE which controls TMAR. Together with this transaction, Portugal Telecom should get a 12% stake in TMARPART.
Manageable Liquidity, Leverage Expected to Decline:
Liquidity is underpinned by high cash balances, strong cash generation, access to credit and a manageable debt maturity profile. The company is expected to refinance upcoming maturities in the next few years while gradually reducing debt. The target of net debt-to-EBITDA of approximately 1.7x is well positioned within the rating category.
For the 12 months ended Dec. 31, 2010, total debt-to-EBITDA and net debt-to-EBITDA were 2.9x and 1.8x, respectively. Taking into account the proportion of the 49% ownership in Brasil Telecom, total debt-to-EBITDA and net debt-to-EBITDA ended 2010 at 3.2x and 2.2x. While an exchange with third party shareholders of BTM for shares of TMAR is currently suspended, a successful restructuring resulting in TMAR owning close to a 100% of BTM, will be view as positive to credit quality.
Total consolidated gross debt for TNE is expected to gradually decline over the next few years, while net debt-to-EBITDA should remain close to 1.7x over the long term. As of Dec. 31, 2010, total consolidated debt at TNE was BRL29.9 billion; composed of 26% of the debt by financial institutions, 23% local debentures, 21% BNDES debt, 17% bonds, 10% international development banks and 3% of other debt. After hedges, only 2% of total debt has exposure to foreign currency; similar to FX exposure by other incumbent peers in the region. Of total debt and cash, BRL4.4 billion/BRL6 billion is allocated at BTM, BRL23.7 billion/4.6 billion at TMAR and BRL1.7 billion/0.6 billion at TNE with indebtedness having an average cost of 105.6% of the CDI rate.
Healthy Operational Cash Generation; Higher Capex Can Pressure Free Cash Flow in 2011:
On a consolidated basis, TNE's EBITDA reached BRL10.3 billion in 2010, with a recovery in its margin to 35%. Cash flow from operations (CFO) of BRL5.8 billion was strong and sufficient to cover dividends payments (BRL1.2 billion) and a lower capex (BRL3.6 billion), leaving a free cash flow (FCF) of BRL1 billion. Fitch expects that higher capital expenditures during 2011, in the range of BRL5 billion to BRL6 billion, should pressure FCF. However, going forward capital expenditures should return to historical levels underpinning FCF.
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 results in a material change in the company's capital structure and an expectation of a sustained increase in net leverage above 1.7x over time. Given the rating upgrade, a positive rating action in the near to medium term is unlikely, however, positive factors to credit quality include growing cash flow from mobile services in Sao Paulo, a successful share exchange between TMAR and BTM, a better that expected participation on the capital increase and geographical diversification abroad Brazil.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Rating Global Telecoms
Companies', Sept. 16, 2010;
--'Corporate Rating Methodology', dated
Aug. 16, 2010;
--'Parent and Subsidiary Rating Linkage (Fitch's
Approach to Rating Entities Within a Corporate Group Structure)', July
14, 2010;
--'National Ratings Criteria', Jan. 19, 2011.
Applicable Criteria and Related Research:
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Parent
and Subsidiary Rating Linkage Criteria Report
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826
Corporate
Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Rating
Global Telecoms Companies - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205
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