Fitch Places Tele Norte Leste Participacoes On Watch Negative; Affirms Telemar Norte Leste
RIO DE JANEIRO, Brazil--Fitch Ratings has taken the following actions for Tele Norte Leste Participacoes S.A. (TNE) and Telemar Norte Leste S.A. (TMAR) following the controlling shareholder's, Telemar Participacoes S.A. (TMARPART), BRL11 billion tender offer for all outstanding preferred shares of TNE and TMAR:
TNE
--Local currency Issuer Default Rating (IDR) of 'BBB-' placed on Rating Watch Negative;
--Foreign currency IDR affirmed at 'BB+' with Stable Outlook;
--National scale rating of 'AA+(bra)' placed on Rating Watch Negative.
TMAR
--Local currency IDR affirmed at 'BBB-'; Outlook Stable;
--Foreign currency IDR affirmed at 'BB+'; Outlook Stable;
--National scale rating affirmed at 'AA+(bra)'; Outlook Stable.
The rating action reflects the direct and indirect leveraging impact the transaction will have on holding company, TNE, and operating company, TMAR. The transaction is expected to be initially funded entirely by debt at the controlling shareholder level, TMARPART, which may be refinanced with a mix of debt and new equity over the medium term. On a pro forma basis, the transaction will increase TMARPART's consolidated total debt levels to approximately BRL 20.9 billion from BRL 9.9 billion and increase its net debt to BRL 16.1 billion from BRL 5.1 billion. Total debt-to-EBITDA will increase to 3.4 times (x) from 1.6x and Net debt-to-EBITDA will increase to 2.6x from 0.8x. EBITDA at year-end 2006 was BRL 6.1 billion and cash was BRL 4.7 billion.
While the ultimate organizational and capital structure of the group remains unclear, the transaction once complete may facilitate the controlling shareholders previously stated goal of simplifying its ownership structure, allowing it to eliminate the intermediate holding company and to create one class of common shares at TMARPART; similar to last year's share exchange offer. A simplified ownership structure would positively increase overall financial flexibility for the group with regard to funding sources and could lead to greater transparency and improvements in corporate governance.
The merging of TMARPART and TNE would clearly pressure the credit quality of TNE and at a minimum indirectly burden the operating company, TMAR, given the need to increase dividend cash flow to service the new additional holding company debt. Debt at TMAR may also increase if a large one time dividend is made to partially repay the bridge debt used to fund the acquisition of the preferred shares. A one time TMAR dividend would be limited to retained earnings of approximately BRL2.6 billion and could be funded either with balance sheet cash or new debt. The debt at the holding company level(s) would be structurally subordinate to the debt at the operating company and likely be notched lower than the operating (TMAR) debt.
The transaction will be completed only if shareholders representing at least 66% of TNE's preferred shares accept the tender off. Assuming that 100% of elects at TNE and TMAR to participate, TMARPART will have approximately 85% of TNE total shares which in turn, TNE will control close to 98% of TMAR total shares. Fitch expects that initially TNE ratings may be affected depending on the amount of TMARPART debt that will need to be serviced with dividends flowing from TMAR to TNE to TMARPART.
TMAR's ratings are supported by its solid business position, strong cash flow generation and financial profile. TMAR continues to hold a leading market position in local service and long distance in region I. In addition, the company is one of the largest wireless operators in its region. TMAR's credit quality is underpinned by the strength of its local fixed line service. The company derives a significant portion of revenues from local service operations, which is expected to remain as the main cash flow generator for the company, although the ratings incorporate increased substitution of fixed traffic by wireless traffic and traffic loss due to substitution of dial up internet services by broadband services.
Telemar provides telecommunications services in region I, which comprises 16 states and includes Rio de Janeiro. Telemar also provides Internet, data transmission, and long-distance services. TNE is majority controlled by Telemar Participacoes S.A., which is in turn controlled by a group of Brazilian investors. TNE had net revenues and EBITDA during 2006 of BRL16.9 billion and BRL6.1 billion, respectively.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts
Fitch Ratings
Sergio Rodriguez, CFA, +52 81 8335-7179, Monterrey
Mauro Storino, +55 21 4503-2600, Rio de Janeiro
Media Relations:
Christopher Kimble, 212-908-0226, New York
TNE
--Local currency Issuer Default Rating (IDR) of 'BBB-' placed on Rating Watch Negative;
--Foreign currency IDR affirmed at 'BB+' with Stable Outlook;
--National scale rating of 'AA+(bra)' placed on Rating Watch Negative.
TMAR
--Local currency IDR affirmed at 'BBB-'; Outlook Stable;
--Foreign currency IDR affirmed at 'BB+'; Outlook Stable;
--National scale rating affirmed at 'AA+(bra)'; Outlook Stable.
The rating action reflects the direct and indirect leveraging impact the transaction will have on holding company, TNE, and operating company, TMAR. The transaction is expected to be initially funded entirely by debt at the controlling shareholder level, TMARPART, which may be refinanced with a mix of debt and new equity over the medium term. On a pro forma basis, the transaction will increase TMARPART's consolidated total debt levels to approximately BRL 20.9 billion from BRL 9.9 billion and increase its net debt to BRL 16.1 billion from BRL 5.1 billion. Total debt-to-EBITDA will increase to 3.4 times (x) from 1.6x and Net debt-to-EBITDA will increase to 2.6x from 0.8x. EBITDA at year-end 2006 was BRL 6.1 billion and cash was BRL 4.7 billion.
While the ultimate organizational and capital structure of the group remains unclear, the transaction once complete may facilitate the controlling shareholders previously stated goal of simplifying its ownership structure, allowing it to eliminate the intermediate holding company and to create one class of common shares at TMARPART; similar to last year's share exchange offer. A simplified ownership structure would positively increase overall financial flexibility for the group with regard to funding sources and could lead to greater transparency and improvements in corporate governance.
The merging of TMARPART and TNE would clearly pressure the credit quality of TNE and at a minimum indirectly burden the operating company, TMAR, given the need to increase dividend cash flow to service the new additional holding company debt. Debt at TMAR may also increase if a large one time dividend is made to partially repay the bridge debt used to fund the acquisition of the preferred shares. A one time TMAR dividend would be limited to retained earnings of approximately BRL2.6 billion and could be funded either with balance sheet cash or new debt. The debt at the holding company level(s) would be structurally subordinate to the debt at the operating company and likely be notched lower than the operating (TMAR) debt.
The transaction will be completed only if shareholders representing at least 66% of TNE's preferred shares accept the tender off. Assuming that 100% of elects at TNE and TMAR to participate, TMARPART will have approximately 85% of TNE total shares which in turn, TNE will control close to 98% of TMAR total shares. Fitch expects that initially TNE ratings may be affected depending on the amount of TMARPART debt that will need to be serviced with dividends flowing from TMAR to TNE to TMARPART.
TMAR's ratings are supported by its solid business position, strong cash flow generation and financial profile. TMAR continues to hold a leading market position in local service and long distance in region I. In addition, the company is one of the largest wireless operators in its region. TMAR's credit quality is underpinned by the strength of its local fixed line service. The company derives a significant portion of revenues from local service operations, which is expected to remain as the main cash flow generator for the company, although the ratings incorporate increased substitution of fixed traffic by wireless traffic and traffic loss due to substitution of dial up internet services by broadband services.
Telemar provides telecommunications services in region I, which comprises 16 states and includes Rio de Janeiro. Telemar also provides Internet, data transmission, and long-distance services. TNE is majority controlled by Telemar Participacoes S.A., which is in turn controlled by a group of Brazilian investors. TNE had net revenues and EBITDA during 2006 of BRL16.9 billion and BRL6.1 billion, respectively.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts
Fitch Ratings
Sergio Rodriguez, CFA, +52 81 8335-7179, Monterrey
Mauro Storino, +55 21 4503-2600, Rio de Janeiro
Media Relations:
Christopher Kimble, 212-908-0226, New York
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