(The following statement was released by the rating agency)
-- Manageable debt maturity profile of Bellevue, Wash.-basedtelecommunications provider Trilogy continues to support the rating.
-- We are affirming our 'B-' long-term corporate credit rating andlowering our senior secured notes rating to 'CCC' from 'CCC+', based on ourreview of structural subordination.
-- Although we expect EBITDA to increase, we expect competition andbusiness challenges to prevent Trilogy from improving its financial metrics tosupport a higher rating.
Rating ActionOn Oct. 11, 2012, Standard & Poor's Ratings Services affirmed its 'B-'long-term corporate credit rating on Trilogy International Partners LLC. Atthe 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 belowour corporate credit rating, reflecting the structurally subordinated positionof the parent company's debt to its subsidiaries. The two-notch differenceresults from a ratio of priority debt to assets exceeding 30%, according toour criteria. The outlook is stable.
The rating on Trilogy reflects its "vulnerable" business risk profile, basedon its exposure to country, regulatory, and foreign-exchange risks due to itsoperations in countries with volatile political and economic conditions. Therating also reflects strong competition in its markets, a capital-intensiveindustry, "less-than-adequate" liquidity, "highly leveraged" financial riskprofile, including our expectation that the leverage ratio will likely remainabove 5x and that the company will generate negative free operating cash flowthrough 2012. Offsetting factors include the some geographic diversity of thecompany's operations, its manageable debt maturities, and growth prospects inNew Zealand and Bolivia.
Trilogy provides wireless communications services through a low-price strategyto 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 Haitiansubsidiary Communication Cellulaire d' Haiti S.A. (ComCel) to Digicel GroupLtd. for approximately $79.5 million. The company deposited $8 million of thepurchase price into an escrow as a security for indemnification obligations toDigicel. Trilogy will receive the escrow money in tranches over three years,subject to any indemnification payments that may arise. Since the firstquarter of 2012, Trilogy started reporting ComCel's operations as discontinuedoperations.
Although the sale will decrease Trilogy's revenues by approximately 14% andEBITDA by 15% in 2012, we believe that the net proceeds from the sale and theabsence 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, itsrevenues grew up 14% compared with the same period of 2011, mainly onsubscriber growth across all of its markets, larger proportion of postpaidcustomers in New Zealand, and increase purchase and use of data and SMSservices. Data and SMS generated 24% of total service revenues for the firsthalf of the year. For 2012, under our base-case scenario, we expect amid-single digit decrease in revenues due to the lack of ComCel's revenuecontribution. For 2013, we expect a low-double digit revenue growth onsubscriber growth across all of its markets and increased demand in dataservices. The deployment of LTE in 2013 in New Zealand will support higherdata revenues. Also, greater shift in customer base to postpaid segment willdrive higher ARPUs in this market.
Standard & Poor's expects EBITDA margin to increase to around 17% in 2012 from10.7% in 2011. EBITDA margins will increase as a result of the absence of thelower-margin Haitian operations. Furthermore, New Zealand operations areexpected to be EBITDA neutral this year and positive from 2013 onwards.Finally, the company's Dominican Republic operations will start generatingpositive EBITDA in 2012 due to cost efficiencies. However, the company'sprofitability will remain below that of its peers, about 20%-30%.
Trilogy's financial risk profile is "highly leveraged." For the 12 monthsended June 30, 2012, Trilogy posted EBITDA interest coverage of 1.8x, totaldebt 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-casescenario assumes debt to EBITDA of 5.4x, FFO to debt of 11.2%, and EBITDAinterest 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 creditlines and lack of headroom under its maintenance covenants constrain thecompany's financial flexibility.
We expect sources of liquidity will include cash of $127.4 million as of June30, 2012, and FFO in excess of $60 million in the next 12 months. Cash usesduring the next 12 months will likely include working capital and capitalinvestments for around $158 million, debt maturities of around $8 million, anddividend payments in the range of $7 million - $10 million.
In the coming years, we expect that capital expenditures will remain elevatedas the company continues to expand its operations in New Zealand and for thedeployment of LTE in 2013 and its Bolivian operations continue their networkexpansion, resulting in negative free operating cash flow (FOCF).
The stable outlook reflects the company's manageable debt maturities and ourexpectation that EBITDA will improve as a result of an increase in subscribersand value-added services in the next few years. However, we believe near-termbusiness challenges will likely prevent the company from achieving thenecessary improvement in its financial metrics in 2012 and 2013 that wouldsupport a higher rating, but an upgrade is possible if leverage ratio fallsand remains below 5.0x. If revenue and EBITDA were to decline, resulting in awider negative FOCF generation that would continue eroding the company's cashposition, we could lower the rating.
Related Criteria And Research
-- Key Credit Factors: Business And Financial Risks In The GlobalTelecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings ListDowngradedTo 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)