S&P Cuts NII Holdings (NIHD) to 'CCC+', Outlook Negative
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Standard & Poor's Ratings Services today said it lowered its corporate credit rating on Reston, Va.-based wireless service provider NII Holdings Inc. (Nasdaq: NIHD) to 'CCC+' from 'B-'. The outlook is negative.
At the same time, we lowered the rating on the senior unsecured debt at NII International Telecoms S.C.A., a wholly-owned subsidiary of NII, to 'CCC' from 'B-' and revised the recovery rating to '5' from '3'. The '5' recovery rating indicates our expectation for modest (10%-30%) recovery in the event of payment default. We also lowered the rating on the senior unsecured debt at NIICapital Corp. to 'CCC-' from 'CCC'. The recovery rating on this debt remains at '6', which indicates our expectation for negligible (0%-10%) recovery in the event of payment default.
We removed all ratings from CreditWatch, where we had placed them with negative implications on Nov. 1, 2013, following the company's release of its 2013 third quarter earnings, which included a sharp 78% year-over-year decline in EBITDA.
"The downgrade is based on NII's weak operating and financial performance and our view that the company's financial commitments may be unsustainable over the next few years, although liquidity should remain 'adequate' in 2014," said Standard & Poor's credit analyst Allyn Arden.
More specifically, we believe the company faces uncertain longer-term business prospects given its weak market position as a niche provider of wireless services and greater price-based competition from better capitalized wireless operators. NII's results in the third quarter of 2013 were due primarily to subscriber losses in the Mexico market, investments related to the company's 3G wireless network deployment, weaker local currency rates, and lower average revenue per user (ARPU) in all of its markets. In particular, the shutdown of Sprint Corp.'s legacy integrated digital enhanced network (iDEN) had a significant impact on NII's operating and financial performance in Mexico since its 3G network experienced loading issues, which resulted in heightened churn and net subscriber losses.
The outlook is negative. Despite the company's large cash balances and cost reduction initiatives, we believe there is a greater risk of default over the next few years given our expectation for continued revenue declines and FOCF deficits.
We could lower the rating if the potential for a default increases in the near term, which could be caused by growing competitive pressures, higher churn, subscriber losses, and lower ARPU in Brazil and Mexico such that liquidity deteriorates more rapidly from accelerating FOCF deficits than we currently anticipate.
We do not expect a positive rating action in the near term. We could revise the outlook to stable or raise the rating if NII is able to:
-- Maintain at least 15% cushion under its various covenants at the operating company facilities;
-- Raise additional capital to improve its liquidity position;
-- Demonstrate a trajectory to improve FOCF generation; and
-- Improve the EBITDA margin to above 10% on a sustained basis.
At the same time, we lowered the rating on the senior unsecured debt at NII International Telecoms S.C.A., a wholly-owned subsidiary of NII, to 'CCC' from 'B-' and revised the recovery rating to '5' from '3'. The '5' recovery rating indicates our expectation for modest (10%-30%) recovery in the event of payment default. We also lowered the rating on the senior unsecured debt at NIICapital Corp. to 'CCC-' from 'CCC'. The recovery rating on this debt remains at '6', which indicates our expectation for negligible (0%-10%) recovery in the event of payment default.
We removed all ratings from CreditWatch, where we had placed them with negative implications on Nov. 1, 2013, following the company's release of its 2013 third quarter earnings, which included a sharp 78% year-over-year decline in EBITDA.
"The downgrade is based on NII's weak operating and financial performance and our view that the company's financial commitments may be unsustainable over the next few years, although liquidity should remain 'adequate' in 2014," said Standard & Poor's credit analyst Allyn Arden.
More specifically, we believe the company faces uncertain longer-term business prospects given its weak market position as a niche provider of wireless services and greater price-based competition from better capitalized wireless operators. NII's results in the third quarter of 2013 were due primarily to subscriber losses in the Mexico market, investments related to the company's 3G wireless network deployment, weaker local currency rates, and lower average revenue per user (ARPU) in all of its markets. In particular, the shutdown of Sprint Corp.'s legacy integrated digital enhanced network (iDEN) had a significant impact on NII's operating and financial performance in Mexico since its 3G network experienced loading issues, which resulted in heightened churn and net subscriber losses.
The outlook is negative. Despite the company's large cash balances and cost reduction initiatives, we believe there is a greater risk of default over the next few years given our expectation for continued revenue declines and FOCF deficits.
We could lower the rating if the potential for a default increases in the near term, which could be caused by growing competitive pressures, higher churn, subscriber losses, and lower ARPU in Brazil and Mexico such that liquidity deteriorates more rapidly from accelerating FOCF deficits than we currently anticipate.
We do not expect a positive rating action in the near term. We could revise the outlook to stable or raise the rating if NII is able to:
-- Maintain at least 15% cushion under its various covenants at the operating company facilities;
-- Raise additional capital to improve its liquidity position;
-- Demonstrate a trajectory to improve FOCF generation; and
-- Improve the EBITDA margin to above 10% on a sustained basis.
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