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1、Credit,GlobalMarketsResearch,EmergingMarkets,Global Emerging Markets MexicoDiversified Telecommunication Services3 January 2013,Axtel SAB de CVDialing for help;Axtel launchesexchange offerWe estimate an exit yield for the new notes in the 10.0%-12.0%rangeAxtel announced last week an exchange offer a
2、nd consent solicitation for itsoutstanding bonds.The offer consists of the exchange of the companys 7.625%2017 notes and 9.0%2019 notes for a combination of senior secured bonds,senior convertible secured bonds,and cash.The proposal implies a 35.0%haircutassuming 100.0%participation at the early ten
3、der date.Thus,we believe that untilAxtel shows substantial and,most importantly,sustainable improvements inrevenues,margins,and cash flow generation,the market will require double-digityields.As such,we estimate an exit yield in the range of 10.0%to 12.0%,resulting in a recovery value ranging from U
4、SD55.6 to USD59.7 with price upsidedepending on further improvements in credit fundamentals.In addition to theexchange offer,Axtel is soliciting the elimination of most covenants and events ofdefault related to the outstanding notes.The exchange offer is conditional on majority approval and tower sa
5、lesThe exchange offer and consent solicitation are contingent on a majority approvaland the completion of the sale and leaseback of 890 towers to American Towersfor an amount of USD250m.Of note,the tower transaction is also contingent onthe success of the exchange offer.The exchange offer will addre
6、ss liquidity and leverage,but challenges remainAccording to our calculations,if the transaction is successful,Axtels gross and netleverage could drop from 3.8x and 3.6x in 3Q12,respectively,to a gross leveragein the 2.0 x-2.9x range and a net leverage in the 1.4x-2.0 x range,assumingscenarios of 51.
7、0-100.0%bondholder participation.In addition,we also estimateannual interest-rate savings in the range of USD28m to USD47m depending on ourscenarios.Despite the significant improvement of the companys balance sheet,the transaction does not address Axtels structural operational vulnerabilities,inour
8、view.These include competition from larger players and technology-relatedissues,which have been negatively impacting the companys revenues,marginsand ultimately cash flow generation.As such,we believe the current transactionwill buy Axtels some time,but a sustainable improvement in revenues andEBITD
9、A will continue to depend on execution and on the competitive landscape.The new notes are secured and will rank senior to the current 17s and 19sThe new notes will mature on January 31,2020.However,if more than USD125min aggregate principal amount of the 2019 notes is outstanding on June 22,2019,the
10、 maturity date would convert to June 22,2019.Interests will accrue at the rateof 7.0%annually payable on each January 31 and July 31.Importantly,the newnotes are secured by subsidiaries stocks,equipment,and concessions and,assuch,would rank senior to the 17s and 19s in a liquidation scenario.Deal co
11、mpletion looks likely,but margin of acceptance could be lowWe assume completion of the deal is the most likely outcome.Nevertheless,given the terms and conditions of the offer,we believe there is a risk that themargin of participation could be low and,most importantly,below the optimallevel from Axt
12、els perspective.As such,we maintain our neutral stance on Axtelsnotes at this stage given the uncertainties related to the transaction,but note thatthe bonds could rally if the deal closes successfully at a high acceptance rate(Please refer to page 5 for risks related to our recommendation).Figure 1
13、:Outstanding issues,Company UpdateResearch TeamNatalia CorfieldResearch Analyst(+1)212 Denis ParisienResearch Analyst(+1)212 250-,Mid,Mid,Spd,Total,IssueAXTEL 7.625%Feb17AXTEL 9%Sep19,Amount o/sUSD275mUSD490m,Mdy/S&P/FiCa/CC/NRCa/CC/C,price53.5053.50,yield27.1722.84,OAS26662191,Z-spread26542179,to s
14、ov26152144,return9174,Dur2.793.87,Indicative data.Source:Deutsche BankDeutsche Bank Securities Inc.DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012.,3 January 2013Page 2,Diversified Telecommunication Services Axtel SAB de CVThe offerAxtel announced last week an exc
15、hange offer for its outstanding bondsThe offer consists of the exchange of the companys 7.625%2017 notes and 9.0%2019notes for a combination of senior secured bonds,senior convertible secured bonds,and cashin the following way:(1)USD46.6 notional of new 7.0%senior secured notes due in 2020,(2)USD3.4
16、 notional of 7.0%peso-denominated senior secured convertible dollar-indexed 2020notes,and(3)USD5.0 cash.For early tenders,the company is also offering a consentpayment of USD10.The early tender expires on January 11,while the final date for theexchange offer is January 28.and is also proposing a con
17、sent solicitation in which practically all covenants anddefault events of the current notes are eliminatedMoreover,holders who tender the notes will consent to eliminate most of the events ofdefault and substantially all of the covenants listed in the indentures other than the covenantto pay princip
18、al and interest.The exchange offer is conditional on majority approval and on the sale of 890 towersThe exchange offer and consent solicitation are subject to(1)the receipt of consents of theholders representing a majority in aggregate principal amount of each of the 2017 notes andthe 2019 notes,and
19、(2)the concurrent consummation of the sale-and-leaseback transactionwith MATC Digital,a subsidiary of American Towers Corporation.As we understand,Axtelintends to sell and lease back 890 towers for a purchase price of USD250m.The initialminimum lease term would range from 6 to 15 years and is expect
20、ed to result in additionalannual net expenses of approximately USD20m,according to Axtel.The exchange offer isconditional on the completion of the towers sales and,very importantly,the towers salesare conditioned to the exchange offer.The new notesThe new notes are secured and would rank senior to t
21、he 17s and 19s in liquidationThe new notes will mature on January 31,2020;however,if more than USD125m inaggregate principal amount of the 2019 notes is outstanding on June 22,2019,the maturitydate of the new 20s would convert to June 22,2019,a few months before the expirationdate of the current 9.0
22、%notes due in 2019.Interest will accrue at the rate of 7.0%annually,payable on each January 31 and July 31,starting on July 31,2013.Very importantly andcontrary to the outstanding notes,they are secured by subsidiaries stocks,equipment,andconcessions and,as such,would rank senior to the 17s and 19s
23、in a liquidation scenario.Senior secured notes:They are callable at 105.25%in 2016,103.5%in 2017,101.75%in 2018,and 100.0%after 2019.Prior to January 2016,Axtel can redeemup to 35.0%of the aggregate principal of the senior secured notes at a redemptionprice of 107.0%.Senior secured convertible notes
24、:They are peso-denominated but payable in dollarsunless a holder requests otherwise.They can be converted into ADS or CPOs(Certificados de Participacion Ordinarios)at any time after the 120th calendar dayfollowing the issue date.The initial conversion price is of approximately MXN16.87per ADS or MXN
25、2.41 per CPO and represents approximately 10.0%of Axtelsoutstanding shares.Upon conversion,a holder will not be entitled to any additionalinterest payment.The convertible can be redeemed at a redemption price equal tothe greater of 100.0%of the outstanding amount or the NPV of future cash flowsdisco
26、unted by Treasury plus 0.50%.In addition,if the market price of the CPOsexceeds 200%of the conversion price of MXN2.41 in at least 20 of the past 30trading days,the convertible can also be redeemed.Deutsche Bank Securities Inc.,3Q12,3 January 2013,Diversified Telecommunication Services Axtel SAB de
27、CVCollateral:The new notes are secured by first-priority liens on(1)all capital stock ofall current and future subsidiaries of Axtel,and(2)all current and futuretelecommunications network equipment and concessions,all real property andconstruction and fixtures,and all personal property including tan
28、gible and intangible,excluding only the assets securing Axtels bank facilities.Since the companys bankfacilities are supposed to be fully repaid if the exchange offer is successful,weunderstand that the assets backing the facilities should also be available to serve ascollateral for the new notes.Co
29、venants:The covenant package includes(1)gross leverage up to 4.0 x,(2)subordination of all existing and future intercompany debt to the new notes,and(3)change of control clause at 101%.Balance-sheet impactThe exchange offer will address liquidity and leverage,but challenges remainAccording to our ca
30、lculations,if the transaction is successful,Axtels LTM gross and netleverage could drop from 3.8x and 3.6x in 3Q12,respectively,to 2.0 x and 1.4x assuming100.0%participation;2.4x and 1.6x assuming 80.0%;2.8x and 1.9x assuming 60.0%;and2.9x and 2.0 x assuming 51.0%.In addition,we estimate annual inte
31、rest expense savings inthe range of USD28m to USD47m depending on participation scenarios of 51.0%to 100.0%.Despite the significant improvement of the companys balance sheet,the transaction doesnot address Axtels structural operational vulnerabilities,in our view.These includecompetition from larger
32、 players and technology-related issues,which have been negativelyimpacting the companys revenues,margins and ultimately cash flow generation.As such,we believe the current transaction will buy Axtels some time,but a sustainable improvementin revenues and EBITDA will continue to depend on execution i
33、n one hand and on thecompetitive landscape on the other.Figure 2:Impact under 100%,80%,and 60%acceptance rate scenarios3Q12 pro-forma 3Q12 pro-forma 3Q12 pro-forma 3Q12 pro-forma,100%,80%,60%,51%,Cash,52.7,110.9,133.9,156.8,167.2,Debt,2017 Senior notes2019 Senior notes,275.0490.0,55.098.0,110.0196.0
34、,134.8240.1,Bank Facilities,61.5,Other financing obligations2020 New Senior Secured2020 New Senior Secured Conv.Total debtNet debtLTM EBITDALease expenses(12 months)Adj.LTM EBITDALTM Financial expensesGross leverageNet leverage,47.0873.5820.8229.8229.878.23.83.6,47.0356.526.3429.8318.9229.8(20.0)209
35、.831.92.01.4,47.0285.221.0506.2372.3229.8(20.0)209.839.52.41.6,47.0213.915.8582.7425.9229.8(20.0)209.847.22.81.9,47.0181.813.4617.1449.9229.8(20.0)209.850.62.92.0,Source:Deutsche BankOur assumptions include the repayment of Axtels bank facility in the amount of USD80m,asthe company announced that it
36、 has drawn on an additional USD20m after 3Q12,USD20m ofnet lease expenses following the tower sales,and initial cash balance equal to the reportedamount in 3Q12.,Deutsche Bank Securities Inc.,Page 3,3 January 2013,Diversified Telecommunication Services Axtel SAB de CVExit yield and recovery valueWe
37、estimate an exit yield for the new notes in the 10.0-12.0%rangeThe proposal implies a 35.0%haircut assuming 100.0%participation at the early tender date.Thus,we believe that until Axtel shows substantial and,most importantly,sustainableimprovements in revenues,margins,and cash flow generation,the ma
38、rket will requiredouble-digit yields.As such,we estimate an exit yield in the range of 10.0%to 12.0%,resulting in a recovery value ranging from USD55.6 to USD59.7,with price upside dependingon further improvements in credit fundamentals.This is in line with peers such as NIHD,OGX,Marfrig,Urbi and GV
39、O,which,although higher levered than Axtel will be post the deal,also face execution andin certain casescredibility issues and whose businesssustainability can be questionable.We note that,for the purposes of valuation of theconvertibles,we valued the conversion option at USD2.0,assuming a strike pr
40、ice ofMXN2.41,final maturity in January 31,2020,share price of MXN2.9,and vol in the range of40.0%to 70.0%.Figure 3:Price sensitivity at different exit yields,Exit yield10.0%11.0%12.0%13.0%14.0%15.0%,Senior Secured notes39.837.836.034.332.731.1,Senior Convertible2.92.82.62.52.42.3,Option value2.02.0
41、2.02.02.02.0,Cash+Early consent151515151515,Total,59.757.655.653.852.150.4,Source:Deutsche BankFigure 4:Mid yield vs.duration of Axtel and peersMid yield30.0Axtel 7.625 17,25.020.015.0,Axtel 9.0 19,Marfrig 8.375 18,Marfrig 9.5 20,GVOBR 11.75 22,NIHD 7.625 21,10.0,Marfrig 9.625 16,GVOBR 10.5 18,OGXPB
42、Z 8.5 18,Urbi 9.5 20,Urbi 9.75 22OGXPBZ 8.375 22,5.0,2.5,3.0,3.5,4.0,4.5,5.0,5.5,6.0,DurationSource:Deutsche Bank,Page 4,Deutsche Bank Securities Inc.,3 January 2013,Diversified Telecommunication Services Axtel SAB de CVWhere bondholders and Axtel standHolders of the 17s who chose not to tender coul
43、d be the biggest winnersOn the one hand,bondholders who accept the offer will have more protection in a downsidescenario but will face a minimum 35.0%haircut,have a lower coupon,and hold a longer-duration instrument.On the other hand,bondholders who chose not to tender face higherdownside risks in a
44、 liquidation event but could be the biggest winners in a scenario wherethe transaction is successful by a high margin,particularly the holders of the 17s.A scenarioin which the transaction is not successful would be harmful for all parties involved,in ourview.Deal completion is likely,but margin of
45、acceptance could be lowIn this context,we assume completion of the deal is the most likely outcome.However,webelieve there is a risk that the margin of participation could be low and,most importantly,below the optimal level from Axtels perspective.In a scenario of minimum adherence(51.0%),for instan
46、ce,gross and net leverage would be at 2.9x and 2.0 x,respectively,andannual interest savings at only USD28m,according to our calculations.Watch out for acceptance levelGiven the uncertainties related to the deal,we maintain our neutral stance on Axtels bonds,but note that the bonds could rally in th
47、e event the exchange offer is successful by areasonable margin.We would consider anything above 65.0%as reasonable as it wouldallow Axtel to achieve a higher deleveraging.In this scenario,we could take a more positiveview and reconsider our recommendation.The main upside risk to our recommendation i
48、s the successful completion of the transactionby a large margin.Downside risks include the failure of the transaction and Axtels inability toturnaround the companys operations even in a scenario where the transaction is completed.As mentioned,the deal could substantially improve the companys balance
49、 sheet,but doesnot address structural vulnerabilities.Legal actions that result in substantial liabilities are alsodownside risks.,Deutsche Bank Securities Inc.,Page 5,3 January 2013,Diversified Telecommunication Services Axtel SAB de CV,Figure 5:Summary Financials(USDm),Income Statement(USDm)Total
50、RevenuesCOGSGross ProfitGross MarginGross interest expenseSG&ACash Flow(USDm)EBITEBITDAEBITDA MarginChange in WCChange in Net WABroad OCF(w chg in NWA)Net Interest paidNet capexAcquisitionsBroad Free Cash Flow(FCF w chg in NWA)Free cash Flow(FCF)Net change in debtNet cash generationBalance Sheet(USD
