TEXT-S&P cuts Trilogy International Partners senior secured notes
(The following statement was released by the rating agency)
-- Manageable debt maturity profile of Bellevue, Wash.-based telecommunications provider Trilogy continues to support the rating.
-- We are affirming our 'B-' long-term corporate credit rating and lowering our senior secured notes rating to 'CCC' from 'CCC+', based on our review of structural subordination.
-- Although we expect EBITDA to increase, we expect competition and business challenges to prevent Trilogy from improving its financial metrics to support a higher rating.
Rating Action On Oct. 11, 2012, Standard & Poor's Ratings Services affirmed its 'B-' long-term corporate credit rating on Trilogy International Partners LLC. At the same time, we lowered the rating on the company's senior secured notes to 'CCC' from 'CCC+'. The issue-level rating on the notes is two notches below our corporate credit rating, reflecting the structurally subordinated position of the parent company's debt to its subsidiaries. The two-notch difference results from a ratio of priority debt to assets exceeding 30%, according to our criteria. The outlook is stable.
The rating on Trilogy reflects its "vulnerable" business risk profile, based on its exposure to country, regulatory, and foreign-exchange risks due to its operations in countries with volatile political and economic conditions. The rating also reflects strong competition in its markets, a capital-intensive industry, "less-than-adequate" liquidity, "highly leveraged" financial risk profile, including our expectation that the leverage ratio will likely remain above 5x and that the company will generate negative free operating cash flow through 2012. Offsetting factors include the some geographic diversity of the company's operations, its manageable debt maturities, and growth prospects in New Zealand and Bolivia.
Trilogy provides wireless communications services through a low-price strategy to 3.8 million subscribers in three countries: the Dominican Republic, Bolivia, and New Zealand, with a total population of 24.7 million.
On March 31, 2012, the company sold its 95% ownership interest in Haitian subsidiary Communication Cellulaire d' Haiti S.A. (ComCel) to Digicel Group Ltd. for approximately $79.5 million. The company deposited $8 million of the purchase price into an escrow as a security for indemnification obligations to Digicel. Trilogy will receive the escrow money in tranches over three years, subject to any indemnification payments that may arise. Since the first quarter of 2012, Trilogy started reporting ComCel's operations as discontinued operations.
Although the sale will decrease Trilogy's revenues by approximately 14% and EBITDA by 15% in 2012, we believe that the net proceeds from the sale and the absence of ComCel's capital expenditures will improve its cash position, enabling it to redeploy resources in its existing markets.
During second-quarter 2012, excluding Trilogy's operations in Haiti, its revenues grew up 14% compared with the same period of 2011, mainly on subscriber growth across all of its markets, larger proportion of postpaid customers in New Zealand, and increase purchase and use of data and SMS services. Data and SMS generated 24% of total service revenues for the first half of the year. For 2012, under our base-case scenario, we expect a mid-single digit decrease in revenues due to the lack of ComCel's revenue contribution. For 2013, we expect a low-double digit revenue growth on subscriber growth across all of its markets and increased demand in data services. The deployment of LTE in 2013 in New Zealand will support higher data revenues. Also, greater shift in customer base to postpaid segment will drive higher ARPUs in this market.
Standard & Poor's expects EBITDA margin to increase to around 17% in 2012 from 10.7% in 2011. EBITDA margins will increase as a result of the absence of the lower-margin Haitian operations. Furthermore, New Zealand operations are expected to be EBITDA neutral this year and positive from 2013 onwards. Finally, the company's Dominican Republic operations will start generating positive EBITDA in 2012 due to cost efficiencies. However, the company's profitability will remain below that of its peers, about 20%-30%.
Trilogy's financial risk profile is "highly leveraged." For the 12 months ended June 30, 2012, Trilogy posted EBITDA interest coverage of 1.8x, total debt to EBITDA of 5.5x, and funds from operations (FFO) to total debt of 6.4%, adjusted for operating leases and asset retirement obligations. Our base-case scenario assumes debt to EBITDA of 5.4x, FFO to debt of 11.2%, and EBITDA interest coverage of about 2.0x for 2012 due to EBITDA growth.
We consider Trilogy's liquidity to be "less than adequate" under our criteria. We expect sources of liquidity to exceed uses by more than 1.2x in 2012; however, below that threshold thereafter. Additionally, the absence of credit lines and lack of headroom under its maintenance covenants constrain the company's financial flexibility.
We expect sources of liquidity will include cash of $127.4 million as of June 30, 2012, and FFO in excess of $60 million in the next 12 months. Cash uses during the next 12 months will likely include working capital and capital investments for around $158 million, debt maturities of around $8 million, and dividend payments in the range of $7 million - $10 million.
In the coming years, we expect that capital expenditures will remain elevated as the company continues to expand its operations in New Zealand and for the deployment of LTE in 2013 and its Bolivian operations continue their network expansion, resulting in negative free operating cash flow (FOCF).
The stable outlook reflects the company's manageable debt maturities and our expectation that EBITDA will improve as a result of an increase in subscribers and value-added services in the next few years. However, we believe near-term business challenges will likely prevent the company from achieving the necessary improvement in its financial metrics in 2012 and 2013 that would support a higher rating, but an upgrade is possible if leverage ratio falls and remains below 5.0x. If revenue and EBITDA were to decline, resulting in a wider negative FOCF generation that would continue eroding the company's cash position, we could lower the rating.
Related Criteria And Research
-- Key Credit Factors: Business And Financial Risks In The Global Telecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List Downgraded To From
Trilogy International Partners LLC
Senior Secured CCC CCC+ Ratings Affirmed
Trilogy International Partners LLC
Corporate Credit Rating B-/Stable/--
(Caryn Trokie, New York Ratings Unit)