July 25, 2012 / 4:46 PM / 5 years ago

TEXT-S&P cuts NII Capital Corp ratings

 (The following statement was released by the rating agency)
 
Overview
  -- We have reviewed the recovery methodology for Latin American wireless 
operator NII, lowering its implied valuation multiple at default.
  -- We are revising the recovery rating on NII Capital Corp.'s senior 
unsecured debt to '5' from '4' and lowering our issue-level rating to 'B' from 
'B+'.
  -- We are also affirming our 'B+' corporate credit rating on parent NII 
Holdings.
  -- The stable outlook reflects our expectation that operating and 
financial performance will likely be weaker in 2012 than 2011, although the 
company's leverage provides support for the ratings.

Rating Action
On July 25, 2012, Standard & Poor's Ratings Services revised the recovery 
rating on NII Capital Corp.'s senior unsecured debt to '5' from '4', lowering 
our issue-level rating on the debt to 'B' from 'B+'. The '5' recovery rating 
indicates expectations for modest (10%-30%) recovery in the event of payment 
default. 

At the same time, we affirmed all other ratings, including the 'B+' corporate 
credit rating, on Reston, Va.-based parent company NII Holdings Inc. (NII), a 
wireless operator in Latin America.

Rationale
The rating action follows our review of the recovery methodology for NII. As a 
result, Standard & Poor's has lowered NII's implied valuation multiple at 
default to 4x its projected emergence EBITDA, from 5x given out less favorable 
view of the business in a default scenario. Competitive factors are more 
likely to contribute to lower valuation at default than our previous 
assessment.    

The ratings on NII reflect a "weak" business risk profile and an "aggressive" 
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. Moreover, the 
company faces some technology risk because of its partial dependence on 
Motorola Inc.'s integrated digital enhanced network (iDEN) technology. 
Tempering factors include NII's niche business focused on high average revenue 
per user (ARPU) and low-churn corporate customers, some geographic diversity, 
and solid subscriber growth. Standard & Poor's financial risk assessment is 
based on NII's currently moderate leverage, which we expect to increase over 
the next few years, and our expectation for ongoing free operating cash flow 
(FOCF) deficits because of the company's aggressive expansion plans and 
capital intensity of the industry. 

NII is a wireless carrier with operations in Mexico, Brazil, Argentina, Peru, 
and Chile. At March 31, 2012, the company had about 11 million customers, most 
of which were high-ARPU postpaid subscribers. Mexico and Brazil are NII's 
largest markets, representing about 73% of its subscriber base. Despite 
significant competitive pressures, Brazil remains the company's 
fastest-growing market, including 20.5% subscriber growth in the first quarter 
of 2012, year over year. NII uses iDEN technology, which offers the Direct 
Connect feature, allowing customers to communicate instantly through "push to 
talk" (PTT), although the company is deploying 3G networks in most of its 
markets and is transitioning to W-CDMA technology with PTT capabilities. 

NII's core strategy is to target business customers, which rely on the PTT 
functionality. Its customers generally have higher ARPU and lower churn 
characteristics relative to other Latin American wireless providers, which 
focus on the prepaid segment. Still, while its operating parameters are 
similar to those of most U.S. national wireless carriers, increased 
competitive pressures or changes in economic conditions in these markets can 
abruptly result in higher churn and lower ARPU and hurt NII's financial 
performance.

Despite favorable growth rates over the past few years, operating in 
developing countries exposes NII to potential political, regulatory, economic, 
and foreign exchange risk. The company generates its revenues in local 
currencies while approximately 20% of its costs are in U.S. dollars, creating 
a currency mismatch, which pressures EBITDA when local currencies depreciate 
relative to the dollar. More important, material adverse currency movements 
impair the company's ability to service its debt, about 70% of which is 
currently denominated in U.S. dollars. Partially mitigating this risk, NII has 
implemented some foreign currency hedges for expenditures in Brazil and Mexico 
and is increasing its level of local currency debt relative to U.S. debt. It 
also maintains over 80% of its cash holdings in U.S. dollars.

Given iDEN's data limitations and the growth of 3G wireless services in Latin 
American markets, NII has been acquiring spectrum in Latin America to deploy 
its own 3G technology, which offers more capacity for data services and faster 
broadband speeds, along with PTT capabilities. This will enable the company to 
target higher end consumers and preserve its existing corporate customer base 
in Latin America. However, we consider growth prospects in the consumer market 
highly uncertain, especially as wireless penetration increases. Moreover, NII 
competes with larger and better capitalized wireless carriers, including 
America Movil S.A.B. de C.V. and Telefonica S.A. Some of these operators are 
deploying their own 3G wireless networks and have greater financial resources 
to capture market share. 

In the first quarter of 2012, total revenue was flat, although EBITDA fell 
17%, year over year, due to depreciating local currencies, expenses related to 
the deployment of 3G services in Mexico and Brazil, and pricing pressures, 
most notably in the Brazil market. Additionally, the service margin declined 
to 23% from 28%. We expect margins to decline below 20% in 2012 and 2013 
because of the aforementioned factors although this depends on currency 
fluctuations. Profitability measures are also weak relative to NII's peer 
group because of higher interconnection costs, although regulatory initiatives 
in some of its key markets could help improve the company's cost structure 
longer term.

Liquidity
We consider NII's liquidity "adequate." Sources of liquidity consist of $2.3 
billion of cash, including about $721 million of cash at the operating 
subsidiaries, used to fund operations at these entities. Other sources of 
liquidity are the company's funds from operations, which we expect will be 
around $840 million in 2012. Cash uses are likely to include capital 
expenditures of $1.7 billion in 2012 and $1.2 billion in 2013 related to 
network deployments, payments associated with the acquisition of spectrum 
licenses in Brazil and Mexico, and debt maturities of $150 million in 2012. In 
line with our criteria, we expect sources of liquidity to exceed uses by 1.2x 
and net sources to remain positive, even with a 15% to 20% drop in EBITDA. 

Liquidity at the parent company depends on its ability to upstream cash from 
its subsidiaries as well as external funding. The upstreaming of cash has not 
been hurt by country-specific bank regulations or foreign currency 
fluctuations except in the Argentina market, where the government has recently 
put in certain regulations (although we do not believe that this market is 
critical to NII's overall funding needs). The company generally uses 
intercompany charges such as management fees and intercompany loans to 
tax-efficiently upstream cash. Liquidity at the operating companies depends on 
the generation of free cash flow as well as locally sourced bank credit 
facilities. The Brazilian, Mexican, and Chilean operating subsidiaries each 
have U.S. dollar-denominated facilities, consisting of term loans and 
equipment financing, which it uses to fund those operations. The Mexican and 
Br

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