(The following statement was released by the rating agency)
-- 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