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Rating Action: Moody's Downgrades Oi SA to Ba3, outlook negative The document has been translated in other languages
Global Credit Research - 06 Oct 2015
Sao Paulo, October 06, 2015 -- Moody's America Latina ("Moody's") has today downgraded Oi S.A.'s ("Oi") corporate family rating ("CFR") to Ba3/A3.br. As part of this rating action, Moody's has also downgraded the ratings on unsecured debt at Oi SA to B1/Baa3.br, one notch below the corporate family rating due to their junior position in the capital structure. The company has significant indebtedness at subsidiary holding companies which have a priority claim on the majority of operating cash flows. The outlook for all ratings remain negative.
RATINGS RATIONALE
Ratings downgraded:
Issuer: Oi S.A.
- Corporate Family Rating: to Ba3/A3.br from Ba1/Aa2.br
- USD 102 mm BRAZILIAN DEBENTURES due 2017: to B1/Baa3.br from Ba2/Aa3.br
- USD 602 mm BRAZILIAN DEBENTURES due 2018: to B1/Baa3.br from Ba2/Aa3.br
- USD 63 mm BRAZILIAN BOND due 2020: to B1/Baa3.br from Ba2/Aa3.br
- USD 410 mm BRAZILIAN DEBENTURES due 2020: to B1/Baa3.br from Ba2/Aa3.br
The outlook for all ratings is negative
The downgrade was based on the company's persistently increasing leverage and cash consumption, reducing financial flexibility and leading to credit metrics that no longer commensurate with a Ba1 rating. Moody's believes that despite the company's cost cutting and efficiency efforts, its business will face further margin deterioration from an unfavorable product mix shift to pay TV and broadband and the price pressure inherent in its targeted value segment, especially during the ongoing economic slowdown in Brazil. Further reductions in capital spending may result in future operational and competitive challenges.
Oi's Ba3 corporate family rating reflects its scale, geographic diversity, broad asset base, wide network coverage and strong margins. These strengths are offset by the company's challenges to upgrade its network in Brazil to meet shifting consumer demand, the highly competitive market in the country, the margin pressure it faces from an unfavorable product mix shift and the company's limited financial flexibility given its large debt burden and challenging momentum for funding through capital markets. Moody's forecasts Oi's adjusted leverage will approach 5.5x at year-end 2015, and expects it to continue to consume cash through 2017.
Oi's recent sale of Portugal Telecom's assets increased the company's cash position, but at the same time kept the company's total debt outstanding and interest burden high. Although decreasing due to the company's cost cutting and efficiency efforts, cash burn is still high and we believe it may influence Oi's decision to reduce network investments that would negatively impact their competitive position in the near future. Oi's main competitors, Telefonica Brasil S.A. (Baa2 stable) and America Movil S.A.B de C.V. (A2 stable), remain well capitalized and are investing heavily in Brazil for growth, both organically, with CAPEX and on spectrum, and through M&A.
Oi has an adequate liquidity to meet its obligations over the next 12 to 18 months. On the other hand we forecast that the company will continue to consume cash through 2017, excluding any potential spectrum purchases. Oi had BRL 16.6 billion in cash at the end of June 2015 plus access to approximately BRL 3.0 billion in committed credit facilities and upcoming maturities in the order of BRL 3.6 billion until the end of 2015, BRL 10.8 billion in 2016, and BRL 8.6 billion in 2017. CAPEX is high at around BRL 5.0 billion per year and the company is not expected to generate positive free cash flow at least until 2018, reinforcing its dependency on the capital markets to extend debt maturities.
Moody's rates unsecured debt at Oi S.A. B1/Baa3.br, one notch below the corporate family rating due to its junior position in the company´s capital structure.
Oi's negative outlook reflects its challenges to reduce leverage while still consuming cash in an adverse economic scenario that will affect the company's top line, margins and CAPEX investments.
Moody's could lower Oi's ratings further if leverage remains above 5.0x (Moody's adjusted) for an extended period or if the company is not on a clear trajectory to reduce cash burn.
Although not anticipated in the near term Oi's ratings could be upgraded if leverage is sustained comfortably below 3.75x (Moody's adjusted) and the company produces sustained positive free cash flow. In addition, an upgrade would be predicated upon the company's willingness and ability to continue investing (both network CAPEX and spectrum acquisition) at a level which will improve its competitive position. Alternatively, Moody's could consider an upgrade if the company's asset-light strategy is successful in retaining market share and result in EBITDA growth such that it meets the financial metrics above. Any M&A activity, equity issuance or capital injection that is considered to be a positive credit event, will not necessarily result in positive rating action until its execution.
The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on
www.moodys.com.br for a copy of this methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".
Enviado: 8/10/2015 14:14
