/raid1/www/Hosts/bankrupt/TCRLA_Public/230303.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
L A T I N A M E R I C A
Friday, March 3, 2023, Vol. 24, No. 46
Headlines
A R G E N T I N A
ARCOS DORADOS: Fitch Hikes Foreign Curr. IDR to BB+, Outlook Stable
B E R M U D A
CONDUIT HOLDINGS: Declares Near $90 Million Loss
B R A Z I L
AMERICANAS SA: Appoints Pereira as 3rd CEO Amid Bankruptcy
AMERICANAS SA: To Settle Debt With Small Creditors
C A Y M A N I S L A N D S
VANTAGE DRILLING: Prices Offering of $200-Mil. 9.5% Senior Notes
J A M A I C A
DIGICEL GROUP: Asks Investors to Forego Payments
M E X I C O
SIXSIGMA NETWORKS: S&P Raises ICR to 'B+' on Improved Liquidity
P E R U
TELEFONICA DEL PERU: Fitch Lowers LongTerm IDR to BB-, Outlook Neg.
- - - - -
=================
A R G E N T I N A
=================
ARCOS DORADOS: Fitch Hikes Foreign Curr. IDR to BB+, Outlook Stable
-------------------------------------------------------------------
Fitch Ratings has upgraded Arcos Dorados Holdings Inc.'s Long-Term
Foreign Currency Issuer Default Rating (IDR) and senior unsecured
notes to 'BB+' from 'BB'. In addition, Fitch has upgraded Arcos
Dorados B.V.'s senior unsecured notes rating to 'BB+' from 'BB'.
The Rating Outlook is Stable.
The rating upgrade reflects Arcos Dorados' improved credit metrics
due to the successful refinancing of its 2023 and 2027 bonds, as
well as strong operational performance across most of its markets
in 2022. The rating upgrade also reflects Fitch's expectation of
stable leverage, good operational performance, and continued
organic growth funded from internal cash flow generation.
KEY RATING DRIVERS
Sustained EBITDA Growth: Arcos Dorados' operational metrics show a
solid post-pandemic recovery. LTM revenues as of 3Q22 were nearly
USD3.4 billion, which is higher than the approximately USD3 billion
revenues reported in 2019 and 2018. Fitch estimates LTM EBITDA as
of 3Q2022 to be near USD 388 million , and for it to increase
towards USD400 million over the ratings horizon. New restaurant
openings, particularly in Brazil, in addition to a system-wide
increase in digital sales are expected to principally drive this
growth. Brazil represented roughly 59% of total EBITDA as of 3Q22.
Digital sales, which include Delivery, Mobile App and self-order
kiosks, accounted for 42% sales for the same period.
Stable Leverage Metrics: Fitch expects lease-adjusted net leverage
to be around 3x in 2023 (6.9x in 2020) and to remain relatively
stable over the forecast period as the company expands its
restaurant footprint using its own cash generation. Beyond that,
leverage could improve further as EBITDA contribution from new
restaurants ramps up. The company also benefited from debt
derivatives gains that had a positive impact on net debt, USD65
million in 3Q22, in line with the company's policy to hedge
approximately 50% of its USD denominated debt.
Neutral to Positive FCF: Fitch estimates Arcos Dorados' FCF will be
positive in 2022 and could turn neutral to slightly negative in
2023 as the company implements its growth strategy. However, the
overall FCF trend is positive and improves as the growth cycle
tapers off. Fitch expects capex to be upwards of USD300 million in
2023. Capex is mainly related to store openings, maintenance, and
reimaging.. The company is targeting to open 200 new restaurants
between 2022 and 2024 in accordance with its agreements with
McDonalds.
The company expects to open over 65 new restaurants in 2022 and 75
restaurants in 2023. The number of free-standing restaurant
openings will be about twice the number opened during the most
recent, pre-pandemic growth cycle (2017-2019). The company expects
to open the majority of these restaurants in Brazil and to use a
portion of the capex on its digitalization strategy.
Country Ceiling: Arcos Dorados is headquartered in Argentina
(CCC-), but its cash flow generation is heavily concentrated in
Brazil (BB-/Stable), which is estimated to account for
approximately 40% of sales and 60% of EBITDA in 2022. The Long-Term
Foreign Currency IDR is not constrained by Brazil's Country Ceiling
(BB), given the company's ability to cover hard currency debt
service with cumulative cash flow from higher-rated countries, such
as Chile, Mexico, Colombia, Uruguay, and Panama.
Solid Business Profile: Arcos Dorados' ratings reflect a solid
business position as the sole franchisee of McDonald's restaurants
across Latin America. Arcos Dorados benefits from the McDonald's
brand but faces various regional economic challenges. The company
operated or franchised 2,297 McDonald's restaurants and 289 McCafes
in 20 countries as of 3Q22. About 70% of these restaurants were
operated by Arcos Dorados, while the remainder were franchised.
McDonald's Franchise Strength: The ratings also incorporate the
strength of McDonald's as a franchisor and the longstanding
relationship with Arcos Dorados' owners and management. The master
franchise agreement (MFA) sets strict strategic, commercial and
financial guidelines for Arcos Dorados' operations, which support
the operating and financial stability of the business and the
underlying value of McDonald's brand in the region.
DERIVATION SUMMARY
Arcos Dorados' ratings reflect its solid business position as the
sole franchisee of McDonald's restaurants across Latin America,
benefiting from the iconic McDonald's brand. The company faces the
economic challenges in the region. Most of Arcos Dorados' EBITDA is
generated in Brazil. The company's geographical diversification and
presence in several countries in Latin America outside of Brazil
and Argentina support the Foreign Currency IDR.
The business profile is constrained by the company's smaller size
relative to international peers such as Darden Restaurants, Inc.
(BBB/Stable). Arcos Dorados size in terms of revenues and EBITDA is
more comparable to Alsea, S.A.B. de C.V. (BB/Stable), but Fitch
estimates Arcos Dorado's leverage is lower than Alsea's. The
company also reported lower profitability than its peers due to its
presence in less mature countries.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within The Rating Case for the Issuer:
- EBITDA above USD390 million in 2023;
- Capex of at least USD300 million in 2023;
- Dividends payments remain at current levels in 2023-2024;
- Lease-adjusted net leverage remains around 3x over the ratings
horizon.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Net lease-adjusted debt levels below 2.5x on a sustained basis;
- Maintaining strong liquidity.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Net lease-adjusted debt levels exceeding 3.5x on a sustained
basis;
- Deteriorating liquidity position.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Fitch views Arcos Dorados' liquidity as strong
due to its healthy cash position, committed bank lines and
manageable long-term debt maturity profile. The company's debt
consists primarily of three USD notes, a bond due in 2023 with an
outstanding balance of around USD18 million, a USD385 million bond
due in 2027, and a USD350 million sustainability-linked noted due
in 2029. All the bonds are bullet. The company had USD290 million
in cash and cash equivalents as of 3Q22, and USD25 million of
undrawn committed revolving credit facility with JP Morgan. The
company has minimal short-term debt aside from the 2023 bond
maturity.
ISSUER PROFILE
Arcos Dorados is the world's largest independent McDonald's
franchisee in terms of system-wide sales, and operates the largest
quick service restaurant chain in Latin America and The Caribbean.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
Arcos Dorados B.V.
senior
unsecured LT BB+ Upgrade BB
Arcos Dorados
Holdings Inc. LT IDR BB+ Upgrade BB
senior
unsecured LT BB+ Upgrade BB
=============
B E R M U D A
=============
CONDUIT HOLDINGS: Declares Near $90 Million Loss
------------------------------------------------
Royal Gazette reports that Conduit Holdings Limited, the holding
company of Conduit Re, has preliminarily declared a total
comprehensive loss of $89.7 million for the financial year to
December 31, 2022.
Conduit Re is the pure-play reinsurance business based in Bermuda.
Trevor Carvey, chief executive officer, commented: "Our planned
growth path has continued over the last 12 months while all the
time we have maintained our same disciplined approach to risk
selection, according to Royal Gazette.
"We have seen exceptional growth, supported by our legacy-free
balance sheet and a strong capital base. In a year where the
industry has experienced extreme natural and man-made losses, the
resilience of our results validates our business model.
"Looking forward, we are perfectly positioned to take advantage of
the current exceptional market conditions.
"As the business grows, we will see the benefit from increasing
efficiencies of scale and the significant pipeline of revenue we
have in place which will continue to flow through to earnings. We
are excited by our business prospects for 2023."
In just the second year of operation, gross premiums written for
the year climbed 68.3 per cent over the year before to $637.5
million, the report says.
And in a year with extreme natural catastrophe and man-made losses
for the industry, Conduit Re's balanced and diversified portfolio
recorded a small underwriting profit of $0.3 million, the report
relays.
The company sees further growth opportunities in the hard market,
after an estimated $1.1 billion of ultimate premiums written from
company launch in December 2020 up to December 31, 2022, the report
discloses.
It noted a significant pipeline of unearned premium of
approximately $355 million which will flow through in subsequent
years, the report says.
Its single office location in Bermuda, the company said, enables
dynamic decision making in response to market opportunity, the
report notes.
The earnings report said the company's experienced team had rapidly
developed a reputation for being a responsive, reliable and
relevant counterparty, the report discloses.
The company is blessed with a legacy-free balance sheet with ample
capacity to support the anticipated growth and AM Best has affirmed
the company's A- (Excellent) rating, citing "very strong" balance
sheet strength, the report says.
The report said the January renewals season exhibited significant
hardening of pricing and terms and conditions and Conduit Re's
focused and disciplined approach delivered exceptional January 1
renewals, Royal Gazette relays.
The estimated ultimate premiums written at January 1, 2023 were
approximately $421.4 million (2022: $262.6 million), an annual
increase of 60.5 per cent, Royal Gazette notes.
The overall portfolio year-on-year risk-adjusted rate change, net
of claims inflation, increased by 19 per cent at January 1, 2023,
Royal Gazette discloses.
There was also reduced acquisition costs on new and renewed
business, a continued high renewal retention ratio and the
successful placement of planned retrocession coverage,Royal Gazette
relays.
The analysis stated: "We see this as an enduring environment
creating the opportunity for improved margins in our business
throughout 2023 and beyond," Royal Gazette notes.
"Exceptional pricing environment and continued focus on optimizing
our portfolio supports acceleration towards a mid-80s combined
ratio in the medium-term, to deliver a mid-teens ROE across the
cycle," the report notes.
The report notes that Neil Eckert, executive chairman, commented:
"We have delivered outstanding premium growth in 2022 and have
continued that trajectory at the January 1, 2023 renewals.
"More importantly, we have delivered our first underwriting profit
in a year notable for its elevated catastrophe activity.
"Our business has capital to continue its planned growth and to
take advantage of the opportunities that we see."
===========
B R A Z I L
===========
AMERICANAS SA: Appoints Pereira as 3rd CEO Amid Bankruptcy
----------------------------------------------------------
Daniel Cancel of Bloomberg News reports that Brazilian retailer
Americanas SA appointed its third Chief Executive Officer in six
weeks as it looks to navigate the firm through bankruptcy and
continue operations while negotiating a hefty debt load.
Americanas on Feb. 15, 2023, announced that its board of directors
elected Leonardo Coelho Pereira as the company's new CEO. The
executive will take the place of Joao Guerra, who held the
position on an interim basis since the departure of Sargio Rial,
on January 11th. The dismissal was motivated by inconsistencies in
Americanas accounting entries of approximately R$ 20 billion.
According to the statement, Leonardo Coelho Pereira has experience
in retail companies and was a partner at Alvarez & Marsal, a
consultancy specializing in company restructuring. With the
election of the new CEO, Guerra will return to the post of director
of human resources he held before Rial's departure.
Americanas' board of directors also elected Antonio Luiz Pizarro
Manso to replace Vanessa Claro Lopes on the independent committee,
following the director's resignation.
About Americanas SA
Americanas was one of the largest diversified retail chains in
Brazil, with a wide platform of physical stores, robust e-commerce,
fintech, and has just entered into the niche food retail. It is
listed on B3, being indirectly controlled by billionaire Jorge
Paulo Lemann, Carlos Alberto Sicupira and Marcel Telles.
The retailer nosedived in January 2023 after becoming mired in an
accounting scandal. The firm filed for bankruptcy at a court in
Rio de Janeiro on Jan. 19, 2023.
Americanas sought protection under Chapter 15 of the U.S.
Bankruptcy Code (Bankr. S.D.N.Y. Case No. 23-10092) on Jan. 25,
2023. White & Case LLP, led by John K. Cunningham, is the U.S.
counsel.
AMERICANAS SA: To Settle Debt With Small Creditors
--------------------------------------------------
Jose Orozco of Bloomberg News reports that, according to a filing,
Americanas and allied companies plan to begin settling some debts
with small creditors after a meeting.
Americanas and allied companies plan to pay around BRL192.4 million
in class I and IV net credits in the short term with part of the
funds obtained from the DIP financing without affecting company
cash flow.
The company will continue working to build a consensus to settle
the liabilities of the other creditors.
Americanas and allied companies seek a legal solution capable of
meeting the needs of creditors, reducing the economic impact of the
bankruptcy on them.
About Americanas SA
Americanas was one of the largest diversified retail chains in
Brazil, with a wide platform of physical stores, robust e-commerce,
fintech, and has just entered into the niche food retail. It is
listed on B3, being indirectly controlled by billionaire Jorge
Paulo Lemann, Carlos Alberto Sicupira and Marcel Telles.
The retailer nosedived in January 2023 after becoming mired in an
accounting scandal. The firm filed for bankruptcy at a court in
Rio de Janeiro on Jan. 19, 2023.
Americanas sought protection under Chapter 15 of the U.S.
Bankruptcy Code (Bankr. S.D.N.Y. Case No. 23-10092) on Jan. 25,
2023. White & Case LLP, led by John K. Cunningham, is the U.S.
counsel.
===========================
C A Y M A N I S L A N D S
===========================
VANTAGE DRILLING: Prices Offering of $200-Mil. 9.5% Senior Notes
----------------------------------------------------------------
Vantage Drilling International has priced an offering of $200
million in aggregate principal amount of its 9.500% Senior Secured
First Lien Notes due 2028 and entered into a purchase agreement
with several investors pursuant to which the Company agreed to sell
the Notes to the Purchasers. The Notes will bear interest at an
annual rate of 9.500%, payable semi-annually in arrears on February
15 and August 15 of each year, beginning on Aug. 15, 2023. The
Notes will be fully and unconditionally guaranteed by the Company's
material subsidiaries, other than Vantage Financial Management Co.
The closing of the sale of the Notes is expected to occur soon,
subject to customary closing conditions.
The Company will sell the Notes to the Purchasers in reliance on
the exemption from registration provided by Section 4(a)(2) of the
Securities Act of 1933, as amended. Any resale by the Purchasers
of the Notes shall be (i) to qualified institutional buyers
pursuant to the exemption from registration provided by Rule 144A
under the Securities Act or (ii) pursuant to Regulation S under the
Securities Act. The Company will rely on these exemptions from
registration based in part on representations made by the
Purchasers in the Purchase Agreement.
About Vantage Drilling International
Vantage Drilling International, a Cayman Islands exempted company,
is an offshore drilling contractor, with a fleet of two
ultra-deepwater drillships, and five premium jackup drilling rigs.
Its primary business is to contract drilling units, related
equipment and work crews primarily on a dayrate basis to drill oil
and natural gas wells globally for major, national and independent
oil and gas companies. The Company also markets, operates and
provides management services in respect of, drilling units owned by
others.
Vantage Drilling reported a net loss of $110.25 million for the
year ended Dec. 31, 2021, compared to a net loss of $276.76 million
for the year ended Dec. 31, 2020. As of June 30, 2022, the Company
had $754.30 million in total assets, $96.69 million in total
current liabilities, $347.68 million in long-term debt, $9.96
million in other long-term liabilities, and $299.97 million in
total equity.
* * *
As reported by the TCR on Feb. 20, 2023, S&P Global Ratings placed
all its ratings on Vantage Drilling International on CreditWatch
with positive implications, including the 'CCC' issuer credit
rating. S&P said the CreditWatch placement reflects the likelihood
that S&P will raise its ratings on Vantage Drilling by one notch
after the redemption.
=============
J A M A I C A
=============
DIGICEL GROUP: Asks Investors to Forego Payments
------------------------------------------------
Jamaica Observer reports that Digicel Group has asked investors
possessing US$925-million worth of its bonds to forego payments for
at least 30 days to help the company avoid default as its earnings
continue to be affected by political unrest in Haiti and its cash
flow remains unsustainable compared to the level of its debt.
The bonds in question are due to be repaid on March 1. A Digicel
Group spokesperson confirmed that more than 70 per cent of
bondholders have signalled they will agree to the 30-day grace
period, according to Jamaica Observer. That is well above the 50.1
per cent threshold needed, the report notes.
Digicel has been in talks with large holders of its bonds since
last year about the prospect of swapping the notes for longer-dated
paper, with the aim of putting the outcome to all investors in the
bonds,the report notes. It has since broadened the discussions to
look at the group's wider debt pile, with more than 80 per cent of
its US$4.55 billion of bonds and corporate loans due to mature by
the end of 2025, the report relays.
The spokesperson also said the bondholders are willing to extend
the grace period to 90 days if Digicel enters a restructuring
support agreement, the report discloses.
"Digicel and its advisers remain in ongoing and constructive
discussions with approximately 50 per cent of the group's
bondholders, including a substantial majority of holders of Digicel
Limited's Senior 2023 Notes. On February 21st, Digicel Limited
launched a consent solicitation relating to the company's 6.750 per
cent senior notes due 2023, seeking consent for an initial 30-day
grace period which could be extended to 90 days in certain
circumstances. As of the date of the consent solicitation, the
beneficial owners of more than 70 per cent of the outstanding
principal amount of the notes had already committed to the company
that they will consent to the proposed amendments. The approval
threshold is 50.1 per cent of the outstanding principal amount of
the notes," a statement from the telecommunications provider
outlined, the report relays.
"As discussions are confidential and ongoing, we cannot comment
further at this time," Digicel further informed Jamaica Observer in
response to queries, the report notes.
The proposed grace period is, however, expected to provide the
company with additional flexibility to facilitate restructuring,
the report says. This would be the third debt restructuring
undertaken by Digicel since early 2019 and comes at a time when
interest rates are rising around the world, the report notes.
The senior unsecured bonds, which are scheduled to mature on March
1, have been trading below 40 cents on the dollar since late
November, with creditors concerned about the company's ability to
repay the debt in full and on time, the report adds.
Digicel Credit Rating
But with the telecoms provider not being able to meet its
obligations to bondholders on March 1 as agreed, Fitch Ratings
downgraded the Long-Term Issuer Default Rating (IDR) of Digicel
Group Holdings Limited (DGHL) to 'CC' from 'CCC-', the report
relays. It also downgraded the IDR of Digicel Limited to 'CC' from
'CCC-' and the IDR of Digicel International Finance Limited (DIFL)
to 'CC' from 'CCC+', the report notes.
At the same time, the rating agency indicated that a ratings
upgrade is unlikely prior to a debt restructuring, the report
relays. It added that the "entrance into a grace or cure period
following non-payment of a material financial obligation or the
announcement of a distressed debt exchange would lead to a
downgrade to 'C'", the report notes. Digicel was also warned that
if it filed for bankruptcy protection then it would be downgraded
to 'D', which is the lowest rating grade from Fitch of its 11
rating grades. which go from AAA to D, the report says.
For now, though, Fitch said it decided to apply the same 'CC'
ratings to the three entities - Digicel International Finance
Limited, Digicel Limited and Digicel Group Holdings Limited - under
parent and subsidiary linkage rating criteria as the three entities
are experiencing a distressed situation given that over 70 per cent
of the debt within the group is maturing within the next 18 months,
the report adds.
About Digicel Group
Digicel Group is a mobile phone network provider operating in 33
markets across the Caribbean, Central America, and Oceania
regions.
The company is owned by the Irish billionaire Denis O'Brien, is
incorporated in Bermuda, and based in Jamaica.
As reported in the Troubled Company Reporter-Latin America in April
2020, Moody's Investors Service downgraded Digicel Group Limited's
probability of default rating to Caa3-PD from Caa2-PD. At the same
time, Moody's downgraded the senior secured rating of Digicel
International Finance Limited to Caa1 from B3. All other ratings
within the group remain unchanged. The outlook is negative.
Also in April 2020, the TCR-LA reported that Fitch Ratings has
downgraded Digicel Limited to 'C' from 'CCC', and its outstanding
debt instruments, including the 2021 and 2023 notes to 'C'/'RR4'
from 'CCC'/'RR4'. Fitch has also downgraded Digicel International
Finance Limited to 'CCC+' from 'B-'/Negative, and its outstanding
debt instruments, including the 2024 notes and the 2025 credit
facility, to 'CCC+'/'RR4' from 'B-'/'RR4'. Fitch has removed the
Negative Rating Outlook from DIFL.
===========
M E X I C O
===========
SIXSIGMA NETWORKS: S&P Raises ICR to 'B+' on Improved Liquidity
---------------------------------------------------------------
S&P Global Ratings, on Feb. 28, 2023, raised its global scale
issuer and issue-level ratings on Mexico-based information
technology (IT) managed and data services provider Sixsixgma
Networks Mexico S.A. de C.V. (KIO Networks) to 'B+' from 'B'.
S&P said, "The stable outlook reflects our expectation that KIO
Networks will maintain adequate liquidity, underpinned by the lower
short-term debt and working capital outflows, as well as the
support for expansion investments stemming from equity injections
from its new ownership. It also incorporates that we expect recent
investments will result in greater funds from operations, reducing
the company's dependence on debt to fund growth."
During the first full year of ISQ's ownership, KIO Networks reduced
its short-term debt by about 85% by repaying more than 50% of these
obligations and refinancing the rest. This is part of the new
owner's strategy to improve KIO Networks' short-term capital
structure and to provide further support to deploy growth
investments without compromising liquidity. As of the end of the
third quarter of 2022, ISQ had provided around MXN4.8 million in
equity injections since it acquired KIO Networks in November 2021,
while additional capitalizations were executed during the fourth
quarter. These resources have also helped the company reduce
working capital pressures and fund expansion capital expenditures
(capex). The company plans to maintain increased liquidity headroom
while accelerating revenue growth--mainly driven by the expansion
of the data center segment's capacity--that will ultimately
increase the business' sustainability.
S&P said, "Consequently, we revised our assessment of KIO Networks'
liquidity to adequate and our view of its financial risk to
aggressive. In addition to the larger cushion, our view of the
company's adequate liquidity is supported by its increased covenant
headroom from its stronger leverage metrics and its increased
ability to withstand unexpected adverse events, considering the
reduced refinancing risk."
In 2022, KIO Networks focused on shifting its client portfolio
toward the private sector and enlarging the footprint for its data
center segment. As of third quarter 2022, revenues stemming from
private-sector clients reached over 60% of total revenue, mainly
due to new contracts for the core IT services segment. At the same
time, the company's expansion investments helped increase the data
center segment's capacity by about 13% in the first nine months of
2022, through already designed capacity at its Querétaro and
Tultitlan campuses. An additional 1.5 megawatts of data center
capacity in Toluca, acquired in fourth quarter 2022, brought the
total capacity expansion in 2022 to about 20%.
The growth in both business segments has been underpinned by the
owner's willingness to inject capital and deploy expansion
investments. S&P said, "In our base-case scenario, we forecast this
to translate into average revenue growth above 10% during
2022-2024. KIO Networks will continue to focus on expanding its
data center capacity in the next four years, in line with its
strategic goal of growing its more profitable segment. The data
center segment's planned growth will mainly stem from the capacity
to continue to expand the company's Tultitlan campus, acquired land
in Queretaro to develop two additional campuses, and the potential
to expand the newly acquired facility in Toluca. The ongoing
support from the ownership and the increased liquidity cushion give
KIO Networks room to successfully implement this strategy without
needing to materially increase debt or compromise its liquidity,
which supports our view of higher EBITDA. We forecast this to lead
to adjusted debt to EBITDA remaining below 5.0x for the upcoming
years."
S&P said, "Given that the investments for the planned expansion
have relied on equity injections provided by the new ownership, we
forecast the company to have a larger liquidity cushion in the next
12 months. As the investments begin to mature and generate higher
cash flows, we believe that they will lead to an increase in the
company's scale." This larger scale will let KIO Networks sustain
adequate liquidity and leverage below 5.0x, so that it can manage
its capex and working capital needs without depending on external
funding sources.
On the other hand, despite the forecast growth, KIO Networks will
still lag larger and more diversified international peers in the
technology-related industries that we rate 'BB-', such as Celestica
Inc. (BB-/Stable/--) and Nuvei Corp. (BB-/Stable/--). A further
upgrade of KIO Networks would require a sustainably larger scale
that would translate into cash flow and thus credit metrics
comparable to 'BB-' rated peers.
ESG credit indicators: E-2, S-3, G-3
S&P said, "Social and governance factors are a moderately negative
consideration in our credit rating analysis of KIO Networks. The
business experienced health and safety challenges due to social
distancing measures during the COVID-19 pandemic, which was
reflected in lower revenue from corporate IT services to public and
private clients as remote work increased, along with payment delays
on existing contracts due to clients' reduced liquidity. Our view
on governance factors was unaffected by the acquisition by ISQ
because KIO Networks is still owned by a financial sponsor. Like
most rated entities owned by private-equity sponsors, we think the
company's aggressive financial risk profile points to corporate
decision-making that prioritizes the interests of the controlling
owners." This also reflects the generally finite holding periods
and a focus on maximizing shareholder returns.
=======
P E R U
=======
TELEFONICA DEL PERU: Fitch Lowers LongTerm IDR to BB-, Outlook Neg.
-------------------------------------------------------------------
Fitch Ratings has removed from Rating Watch Negative and downgraded
Telefonica del Peru S.A.A.'s (TdP) ratings, including its Long-Term
(LT) Foreign Currency (FC) and Local Currency (LC) Issuer Default
Ratings (IDR), and senior unsecured PEN1.7 billion notes to 'BB-'
from 'BB'. The Rating Outlook is Negative.
The downgrade and Negative Outlook reflect the near-term
materialization of TdP's tax liability, which will result in a
material deterioration of its leverage profile, although the exact
timing and extent of additional debt financing needed to pay the
tax payments remains uncertain. In addition, the company continues
to operate in an intense competitive environment amid an uncertain
economic backdrop in Peru. While TdP benefits from its scale as the
largest operator in Peru, as well as its diversified product
portfolio, the company's negative FCF has weighed on its financial
profile.
KEY RATING DRIVERS
Materialization of Tax Liability: As of Dec. 31, 2022, the total
provision for income tax liability on TdP's balance sheet was
PEN3.3 billion, with a large portion relating to a long-running tax
dispute with Peruvian authorities. In January 2023, Peru's supreme
court ruled in favor of its tax agency, SUNAT, in relation to the
outstanding income tax provisions stemming from the dispute, in
which TdP will be ordered to make payments in the near term.
The exact amount, timing, and structure of the payments are not yet
known. Fitch expects, according to what the recent shareholders
meeting approved, that the company will seek additional financing
and potential additional capital contributions to service these
payments (in addition to the partial capitalization of shareholder
loans which have already been disbursed), and this will affect the
company's financial profile. Peruvian companies facing tax
liabilities have the option to extend a portion of the final
settlement payment up to six years by following standard procedures
with the SUNAT.
Leverage Expected to Worsen: Improvements in EBITDA in 2022
resulted in net debt/EBITDA improving to 2.2x as of year-end 2022,
from 3.1x in 2021, driven in part by cost savings initiatives.
While the extent and timing of new financing to cover near-term
material tax payments is not yet known, Fitch expects leverage to
materially weaken, as the company is likely to finance a
significant portion of the near-term payments with debt financing.
Positively, TdP has already received disbursements of a shareholder
loan of PEN365 million, which has been partially capitalized.
Additional disbursements and capitalizations are possible, but this
remains uncertain.
Relatively Weak Profitability, Negative FCF: Fitch expects FCF to
gradually improve over the rating horizon but to remain negative
and continue to weigh on the company's financial profile. While
mobile revenues have mostly recovered off of pandemic lows, fixed
revenues have remained weak. EBITDA margins improved impressively
in 2022 on cost savings initiatives but remain relatively weak
compared to peers in the region.
Fitch expects an acceleration of fiber rollout and low single digit
ARPU growth to offset declining demand for fixed voice, generating
revenue growth in the low single digits for the fixed business over
the rating horizon. A more stable mobile competitive environment,
growing demand for broadband, and cost containment efforts should
result in modest EBITDA margin expansion over the rating horizon.
Fitch forecasts capital intensity of just under 10% while margins
will likely only improve marginally as competition spurs network
investments, limiting FCF improvement.
Strong Market Shares and Diversification: TdP's business profile,
particularly in terms of market share and diversification, remains
solid. It is well-diversified between fixed and mobile service
offerings despite market share losses in recent years due to
intense competition, most notably on the mobile side as Entel and
Bitel (Viettel Group) continue to attract customers. Fitch
estimates TdP has a mobile subscriber share of approximately 30%
and a fixed-line subscriber share of over 60%.
The company plans to focus on expanding and improving its fixed
services over the medium term, mainly through the acceleration of
fiber deployment. Fitch expects marginal improvement in ARPUs on
price increases as consumer spending improves and the product
portfolio shifts to higher-value services.
Linkages with Telefonica S.A.: Fitch rates TdP on a standalone
basis, and does not factor in any expectation of significant
support from ultimate parent Telefonica S.A. (TEF; BBB/Stable).
Fitch rates TDP on a standalone basis, given the stronger financial
profile of parent Telefonica SA relative to TdP, while legal,
strategic, and operational incentives for support from the parent
are low.
DERIVATION SUMMARY
In comparison with regional peers in the 'BBB' rating category,
TdP's business position is toward the lower end of the category
because of its still-leading but weakening market positions in the
highly competitive Peruvian telecom industry. The company's
financial profile has deteriorated since 2016 due to intense
competition. This has caused a general decline in operating margins
and cash flow generation, which are now more in line with 'BB'
category issuers.
TdP's business position is roughly in line with sister company
Telefonica Moviles Chile (TCH, BBB+/Negative) in terms of service
diversification and market position, although TMCH is stronger
financially, supported by lower leverage and consistently positive
FCF. TdP's business profile is comparable with Colombian peers UNE
EPM Telecomunicaciones S.A. (Tigo UNE, BBB-/Stable) and Colombia
Telecomunicaciones S.A. E.S.P. (ColTel, BBB-/Stable) with respect
to market shares in fixed and mobile, although Tigo UNE and ColTel
have higher margins and lower leverage metrics that are more in
line with investment-grade issuers.
TdP is rated three notches below competitor Entel (BBB/Stable), as
Entel has been able to capitalize on its improved scale in Peru and
sustained its strong operational performance in Chile. Although
TdP's large fixed-line presence supports its business position in
Peru, Entel has a superior financial profile due to the continued
strength in its Chilean operations and improving profitability
metrics in Peru.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within the Rating Case for the Issuer
Include
- Mobile revenues grow to PEN3.9 billion from PEN3.5 billion over
the rating horizon;
- Low-single-digit growth in mobile subscribers and growth in
ARPUs;
- Fixed revenues remaining relatively flat, near PEN3.5 billion
over the rating horizon;
- Continued double-digit declines in fixed-line voice subscribers,
partially offset by broadband subscribers growing in the low single
digits, with fixed ARPUs growing in the low-single-digit percentage
range;
- EBITDA margins gradually improving to around 15.7%, with an
improved pricing environment partially offset by some continued
cost inflation;
- Capital expenditures near 10% of revenues;
- Material tax payments pressure FCF.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Stabilization of the ratings is dependent on the company
achieving stability in market position and margin expansion above
forecasts and attaining greater clarity on manageability of tax
liability payments;
- Sustained neutral or positive FCF generation.
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Continued deterioration of margins and competitive position
regardless of credit metrics;
- Total debt/EBITDA sustained above 4.5x or net debt/EBITDA above
4.0x;
- Unfavorable financing structure of tax payments.
LIQUIDITY AND DEBT STRUCTURE
Uncertain Liquidity: As of Dec. 31, 2022, the company had PEN303
million in short-term debt, and readily available cash of PEN433
million. TdP benefits from its manageable amortization schedule,
with the majority of its debt maturing beyond 2025, including its
PEN1.7 billion note due in 2027. However, projected negative FCF,
including the impact of material tax payments, implies that the
company will need to secure additional debt financing in the
near-term. Positively, the company's existing debt is completely
payable in Peruvian soles, limiting foreign exchange risk for the
company.
ISSUER PROFILE
Telefonica del Peru S.A.A. is the largest integrated telecom
operator in Peru in terms of revenue share. The company provides
mobile and fixed-line telephony, broadband and Pay-TV though its
Movistar brand, as well as IT solution services for corporate
clients.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
Telefonica del
Peru, S.A.A. LT IDR BB- Downgrade BB
LC LT IDR BB- Downgrade BB
senior
unsecured LT BB- Downgrade BB
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Latin America is a daily newsletter
co-published by Bankruptcy Creditors' Service, Inc., Fairless
Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C.,
USA, Marites O. Claro, Joy A. Agravante, Rousel Elaine T.
Fernandez, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A.
Chapman, Editors.
Copyright 2023. All rights reserved. ISSN 1529-2746.
This material is copyrighted and any commercial use, resale or
publication in any form (including e-mail forwarding, electronic
re-mailing and photocopying) is strictly prohibited without prior
written permission of the publishers.
Information contained herein is obtained from sources believed to
be reliable, but is not guaranteed.
The TCR Latin America subscription rate is US$775 per half-year,
delivered via e-mail. Additional e-mail subscriptions for members
of the same firm for the term of the initial subscription or
balance thereof are US$25 each. For subscription information,
contact Peter A. Chapman at 215-945-7000.
.
* * * End of Transmission * * *