Fitch Affirms Oi's IDRs at 'B-'; Outlook Stable
28 MAY 2019 01:05 PM ET
Fitch Ratings-Chicago-28 May 2019: Fitch Ratings has affirmed Oi S.A.'s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B-', the National Long-Term Rating at 'BB-(bra)', and the 2025 notes rating at 'B-'/'RR4'. The Rating Outlook is Stable.
The ratings reflect improvements to Oi's financial profile after the company's debt restructuring. The ratings also reflect Oi's weak operating performance, challenged competitive position, and uncertain turnaround prospects. The 2025 notes rating is capped by Fitch's Country-Specific Treatment of Recovery Ratings at 'RR4', equalizing the ratings with the IDR.
Oi operates in a sector that is capital intensive and features rapid technological change. Fitch expects the Brazilian telecommunications market will remain competitive amid the country's gradual economic recovery.
KEY RATING DRIVERS
Weak Operating Profile: Oi's competitors made substantial advances while the company's operating performance deteriorated, before and during its judicial reorganization. The company lost market share, most critically in post-paid mobile and residential broadband. Ultimately, Oi's turnaround prospects hinge on its ability to convert network investment into subscribers before amortizations of the restructured principal (plus capitalized interest) begin in 2023. While the emergence of the Brazilian economy from recession will be positive for consumer and business spending, Oi's attempts to regain market share may precipitate price competition, limiting prospects for material growth in the medium term.
Mixed Mobile Results: The decline in Oi's overall mobile numbers belies encouraging trends in both the post-paid and prepaid subscriber bases. Prepaid subscriber losses have slowed for the company compared to the market as a whole, resulting in an increase in market share. In post-paid, the company has returned to growth with an increase in RGUs of approximately 20% YoY. Both of these have coincided with increases in consumer mobile ARPU. Similarly, business mobile continues to grow at an accelerating rate of 17% YoY. The rebalancing of the company's customer mix to the point where post-paid gains offset prepaid losses should improve profitability and cash flow stability in the medium term.
Challenging Residential Prospects: As of 1Q19, the company's broadband market share is 19%, down from 25% in 2015, having lost subscribers in a growing market to both larger integrated operators and smaller internet providers. The company's aggressive fiber roll out through existing fixed-line infrastructure should be an advantage in the medium term, although competitor investments in fiber will remain high. Fitch expects broadband will be the main driver of fixed-line growth in Brazil, given penetration rates, as double digit declines in fixed-line telephony will continue to pressure revenues. Positively, Pay TV has grown consistently, though it accounts for only 11% of the company's residential RGUs.
Declining Revenue and Profitability: In 2018, the company's revenues and adjusted EBITDA fell 7.3%, and 6.3% respectively. While the company has been able to maintain adjusted EBITDA margins through various efficiency measures, the resumption of top-line growth is essential to debt serviceability, as the company's restructured debt begins amortizing in 2023, along with interest payments in 2022. Fitch expects revenue to decline in 2019, as growth in post-paid and fiber broadband is insufficient to fully offset declines elsewhere, before stabilizing in 2020 and returning to growth.
Improved Financial Profile: The elimination of the Oi's debt overhang and the BRL4.0 billion equity raise will enable it to make sorely needed investments in its broadband and mobile network. Furthermore, the recent court ruling in the company's favour regarding its African assets should yield dividends of around BRL2.6 billion. Divestitures of non-core assets and tower sales would provide additional financial flexibility, which is constrained by Oi's investment requirements. Fitch expects leverage to rise as capitalized interest is added to principal and operating income remains pressured.
Capex Dampens Cash Flows: Oi will be FCF negative for the foreseeable future. The company's capex are expected to be around BRL20.0 billion over the next three years, far more than cash flow from operations, which will benefit from low cash interest and tax payments. Fitch does not expect any dividends in the foreseeable future. As network investments are a key pillar in Oi's turnaround, the company has limited room to reduce capex. Following the initial heavy investment schedule, capex is should moderate in the long term.
