MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings downgraded the foreign and local currency Issuer Default Ratings (IDRs) of Oi S.A. (Oi) to 'BBB-' from 'BBB' and the National Scale Rating to 'AA+(bra)' from 'AAA(bra)', including the senior notes and local debenture issuances. A full list of rating actions follows at the end of this release.
The Rating Outlook remains Negative.
KEY RATINGS DRIVERS
The downgrade of Oi's ratings reflects weak operating results and higher net leverage which results in Fitch's expectation that net leverage will remain higher than previously anticipated for the next few quarters. The company's operating results for the second quarter of 2013 were weaker than expected in part related to higher costs, some of them non-recurrent. Fitch views the past guidance by the company of achieving during 2013 EBITDA in the range of BRL9-9.8 billion highly unlikely. For the last 12 months ended June 30, 2013 net debt to EBITDA reached 3.5 times (x) (3.7x including REFIS) with cash balances declining to BRL2.9 billion.
The Negative Outlook reflects Fitch's concerns about Oi's ability to reduce net leverage. A negative rating action could be triggered if the company's net leverage remains consistently at the current levels. Conversely, the Outlook could be revised to Stable if Oi's net leverage declines to or below 3x over time due to improved operating results, lower net indebtedness and net leverage.
Oi's ratings reflect solid market positions, business scale, diverse service platforms and moderate regulatory risk. High leverage, recent negative free cash flow and intense competition temper credit quality. The company has taken measures to improve its cash flow by reducing dividends and capex. In addition, Oi's new management is taking actions to improve the cost structure, which can take time. While proceeds from the sale in July of Globenet and the rights of use of towers should be received in the second half of 2013, Fitch still sees net leverage above 3x for year-end.
Reduced Liquidity:
Cash and marketable securities have declined to BRL2.9 billion from BRL6.8 billion during the first six months of 2013. In Fitch's opinion, Oi has flexibility to manage its short term maturities. The company has credit facilities of close to BRL4 billion (including two committed credit facilities for USD1 billion and BRL1.5 billion), a BRL3.4 billion facility with BNDES for capex plus BRL2.3 billion of future cash inflow once the sales of assets during July materialize. Debt maturities for the next 18 months include BRL1.5 billion in 2013 and BRL4.1 billion in 2014 out of the total debt of BRL34.9 billion without considering derivatives and REFIS. In addition, Fitch does acknowledge that the recent cut in the dividend policy to BRL500 million per year from BRL2 billion and expectation of lower capex in the future can support Oi's liquidity and cash flow.
RATING SENSITIVITY
--Consistently having a net leverage close to 3.5x or perception by Fitch that the company is not making progress toward reducing the net leverage due to weak operating results, higher investments/distributions to shareholders or weak economic conditions are likely to pressure the ratings.
--Oi making firm progress towards reducing net leverage to or below 3x in conjunction with stable operating performance and cash flow generation or improved operating performance and profitability can support the revision of the Outlook to Stable.
Fitch has downgraded Oi's ratings as follows:
--Local Currency IDR to 'BBB-' from 'BBB';
--Foreign Currency IDR to 'BBB-' from 'BBB';
--National scale rating to 'AA+(bra)' from 'AAA(bra)'.
--BRL1 billion senior notes due 2022 at 'BBB-' from 'BBB';
--US$1.75 billion senior notes due 2020 'BBB-' from 'BBB';
--US$750 million senior notes due 2019 'BBB-' from 'BBB';
--EUR750 million senior notes due 2017 'BBB-' from 'BBB';
--BRL2.25 billion fifth debenture issuance maturing 2014 & 2020 AA+(bra)' from 'AAA(bra)';
--BRL1.5 billion tenth debenture issuance due 2019 AA+(bra)' from 'AAA(bra)';
--BRL800 million eleventh debenture issuance due 2020 and 2023 'AA+(bra)' from 'AAA(bra)';
--BRL1.1 billion senior notes due 2016 'BBB-' from 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)' (Aug. 5, 2013);
--'Rating Telecom Companies-Sector Credit Factors' (Aug. 9, 2012);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Rating Telecom Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=799666
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