Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Trilogy International Partners, Inc. (TIP Inc.) and Trilogy International South Pacific LLC (TISP) at 'CCC+' and withdrawn the IDR at Trilogy International Partners, LLC.
Fitch has also affirmed the $51 million TISP senior secured notes at 'B+'/'RR1' and assigned a 'CCC+'/'RR4' rating to the $357 million exchanged TISP senior secured notes due 2023.
The affirmation of Trilogy's ratings reflects the completion of the exchange offer and consent solicitations that extends the debt maturity to May 2023. Fitch views the transaction as a credit positive that provides additional runway to pursue additional strategic actions including asset monetizations that reduce HoldCo level debt and further refinancings as Trilogy looks to create a more sustainable capital structure.
Fitch is withdrawing the Long-Term IDR at TIP LLC as the TIP LLC notes were repaid.
KEY RATING DRIVERS
Exchange Transaction Positive: Fitch views the completion of the exchange offer and consents solicitation as a credit positive that extends current Holdco maturities around 12 months to 2023. This provides additional runway and added flexibility to pursue additional strategic actions including asset monetizations that reduce HoldCo level debt and further refinancings as Trilogy looks to create a more sustainable capital structure.
Preparing for 2degrees IPO: Trilogy is preparing for an IPO of 2degrees on the New Zealand Stock Exchange and Australian Securities Exchange by the end of 2021. Fitch views an IPO as a credit positive that could help support a more sustainable organizational structure over the medium term through the reduction of debt at the HoldCo level. Net proceeds would be used to accelerate growth initiatives for 2degrees and reduce debt at the HoldCo level.
Bolivian Asset Sale Uncertainty: Trilogy was in discussions with potential buyers regarding a sale of the Bolivian assets prior to the pandemic. While the company has reengaged with certain parties that are under non-disclosure agreements, Fitch views a potential asset sale of the Bolivian operations in the medium term as indeterminate given the current environment in Bolivia due to the on-going political instability, social unrest and operating challenges that were exacerbated by the coronavirus pandemic. The on-going challenges make any discussions with potential buyers highly uncertain until greater political and operating clarity emerges
Inefficient OpCo/HoldCo Structure: The corporate structure is less than optimal when upstreaming dividends due to cash leakage from withholding taxes and minority interest distributions in both Bolivia and New Zealand. Upstreaming dividends are also subject to FX risk. NuevaTel was historically a dividend contributor and paid dividends of more than USD300 million to Trilogy since 2008. However, due to the deterioration in the Bolivian operations, Trilogy became solely reliant on distributions from New Zealand operations.
Consequently, Trilogy completed a $50 million debt issuance at TISP in late 2020 to improve liquidity reserves that are being used for HoldCo debt servicing costs and allows 2degrees more flexibility to make growth-related investments during 2021 to improve its competitive position. Fitch anticipates Trilogy will have sufficient liquidity to fund HoldCo operating costs including debt servicing during 2021.
TISP Collateral and Ranking: The new $357 million exchanged TISP notes are guaranteed by Trilogy LLC, Trilogy International South Pacific Holdings LLC (TISPH) and the Bolivian Holding companies. The $357 million TISP Notes are secured by a first priority lien of the equity interests in TISPH and TISP, a pledge by TISP of its interest in its loans to Trilogy LLC, and by a first priority lien on the NuevaTel/2degrees proceeds cash collateral account.
The $51 million TISP notes have priority in recovery ahead of the $357 million TISP notes in respect to the collateral for net proceeds received with any dispositions of collateral or in any insolvency proceeding.
Good Momentum in New Zealand: The New Zealand operations maintained good operational momentum during the coronavirus pandemic with service revenue and EBITDA increasing 8% (6% reported) and 13% (5% reported), respectively during 2020. 2degrees results have benefitted from lower post-paid churn, increased post-paid subscribers and expanded EBITDA margins. 2degrees' market challenger strategy has enabled the company to take market share from the incumbents. 2degrees is focused on growing its postpaid share, increasing penetration in the business sector, increasing bundled broadband growth and leveraging 5G/fixed wireless strategy.
Bolivian Operations Challenged: Significant cash flow deterioration occurred in the Bolivian operations during the past several years. This was due to the competitive environment from mobile number portability, social unrest from political instability and aggressive promotional offers resulting in significant subscriber and ARPU erosion and more recently, the coronavirus pandemic. As a result, 2020 EBITDA declined to approximately USD6.6 million from approximately USD82 million in 2016. While subscriber results stabilized during the latter half of 2020, significant operating uncertainty remains for 2021 given the current operating environment in Bolivia.
DERIVATION SUMMARY
Trilogy's 'CCC+' rating reflects its small scale, material exposure to the higher risk operational environment in Bolivia, challenger brand strategy, low profitability and constrained financial profile. 2degrees in New Zealand and NuevaTel in Bolivia compete against much larger peers in three-competitor markets. Both operating companies maintain market share in the low- to mid-20% range with substantial exposure in both markets to lower-valued prepaid subscribers. In early 2020, 2degrees entered into a network sharing arrangement which supports a more efficient capital deployment.
The ratings are not constrained by Bolivia's operating environment or Country Ceiling of 'B', but the company is wholly exposed to FX fluctuations due to its reliance on servicing HoldCo debt from international operations, although the Bolivian boliviano is pegged to the U.S. dollar.
2degrees competes with a former operating subsidiary of Vodafone Group Plc (BBB/Stable) in New Zealand, which has more expansive scale and financial resources. Vodafone sold the operations in 2019 to a New Zealand infrastructure company and Canadian asset management firm.
In Bolivia, NuevaTel competes against Tigo, S.A., an operating subsidiary of Millicom International Cellular S.A. (MIC; BB+/Stable), which has a much stronger business and financial profile.
Millicom's ratings reflect geographic diversification, strong brand recognition and network quality, all of which contributed to leading positions in key markets, a strong subscriber base, and solid operating cash flow generation. In addition, the rapid uptake in subscriber data usage and Millicom's ongoing expansion into the underpenetrated fixed-line services bode well for medium- to long-term revenue growth. Despite the company's diversification benefits, Millicom's ratings are tempered by the issuer's presence in countries in Latin America with low sovereign ratings and low GDP per capita. Millicom's ratings incorporate Fitch's expectation that the company will reduce net leverage below 3.0x in the short to medium term, backed by solid cash flow generation with net leverage expected to reach 2.7x by 2022.
Oi S.A.'s (CCC+) is another telecom peer with ratings that reflect its restructured financial profile and the still-uncertain outlook for its turnaround strategy following the reorganization of the group's activities. Oi will concentrate on developing fiber optic infrastructure, to be deployed for retail and wholesale (i.e. other telecom operators) customers through the services segment.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer (same as previous forecast)
Consolidated EBITDA in the range of USD110 million to USD120 million;
Capex above 2019 levels;
Consolidated ending cash in Bolivia, New Zealand and HoldCo level between USD50 million to USD75 million;
A moderate FCF deficit;
Annual operating cash costs including debt service costs of roughly USD45 million at the HoldCo level;
Core telecom leverage (debt/operating EBITDA adjusted for financial services) in the upper 5x range.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Successful IPO of the New Zealand operations;
Debt repayment at TISP using proceeds from strategic transactions combined with a refinancing of TISP notes that improves sustainability of capital structure;
Improved FCF prospects with sufficient liquidity throughout the organizational structure including HoldCo debt service requirements combined with adequate flexibility to make growth-related capital investments in New Zealand to sustain 2degrees' competitive position.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The inability to complete an IPO of the 2degrees operations;
Insufficient liquidity due to an inability, or any material limitations, with upstreaming cash from operating subsidiaries. This could include any unforeseen impediment, regulatory or of another nature, in upstreaming cash to the parent level;
Weaker than expected operating performance in New Zealand;
Further deterioration of operating performance in Bolivia.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Limited Liquidity Headroom: Trilogy's consolidated cash, cash equivalents and restricted cash was about USD93 million for 1Q21) including USD30.4 million held at 2degrees, USD30.9 million held at NuevaTel and USD32.0 million held at the parent level. Trilogy also had short-term investments of USD10.0 million. The USD50 million debt issuance at TISP LLC during 4Q20 supports improved near-term liquidity for debt service at the HoldCo level.
Trilogy does not have a revolving bank facility at the HoldCo level and is subject to FX fluctuations that could negatively affect debt servicing costs at the HoldCo. The company has suspended the dividend at Trilogy International Partners, Inc. of CAD0.02 per common share, roughly CAD1 million. OpCo Capital Structures: Both 2degrees and NuevaTel operations have local facilities agreements to provide local debt capacity for operational support. 2degrees completed a bank syndication for a new three-year senior facilities agreement in February 2020 with an upsized aggregate commitment for NZD285 million from NZD250 million.
The agreement consists of a NZD235 million, or USD169.5 million, facility that was fully drawn at closing with no amortization requirements, a NZD30 million investment facility that was fully drawn at the end of 1Q21, and a NZD20 million working capital facility that was fully drawn.
The senior facilities agreement provides for an uncommitted NZD35 million accordion facility that can be used to fund capex. 2degrees has substantial cushion under its main covenants, including net leverage of not greater than 3.00x until Dec. 31, 2020; 2.75x from Jan. 1, 2021 to Dec. 31, 2021; and 2.50x thereafter. 2degrees must also maintain a total interest coverage ratio of not less than 3.0x. An additional covenant limits permitted distributions to 100% of FCF and requires a leverage ratio of 2.0x, immediately following the permitted dividend distribution.
NuevaTel has two bank loans totaling USD7 million and USD8 million at the time of the initial draw with modest amortization requirements that mature in 2022 and 2023, respectively. The amount outstanding was USD4.4 million and USD6.2 million, respectively, as of Dec. 31, 2020. The 2022 and 2023 bank loan agreements do not contain financial covenants. The bank loans have no recourse to TIP Inc. or its subsidiaries other than NuevaTel.
In August 2020, NuevaTel commenced a two series bond offering of up to USD24.2 million. NuevaTel raised $20.1 million through this issuance process. NuevaTel used net proceeds to repay existing indebtedness with the remaining proceeds available for capex. The bonds will be secured with certain sources of NuevaTel cash flows. The bonds contain certain financial covenants including a debt service ratio. The debt service ratio will be applicable starting with the 1Q22. The bonds have no recourse to TIP Inc. or its subsidiaries other than NuevaTel.
Recovery Assumptions
The recovery analysis assumes Trilogy would be considered a going concern (GC) in a bankruptcy and the company would be reorganized rather than liquidated. Fitch assumed a 10% administrative claim. The Recovery Rating (RR) considers the Holdco debt's structural subordination to the local operating subsidiaries' debt. Fitch believes the recovery analysis for Trilogy is best performed using a 'sum of the parts' approach, where a waterfall analysis for recovery is performed individually for each operating subsidiary and rolled up to the parent level.
Consequently, Fitch determined a GC EBITDA for each operating subsidiary. The recovery also considers the minority stakes at each operating subsidiary and assigns a proportionate EBITDA to Trilogy. Fitch's recovery analysis includes an additional discount related to the withholding tax the company is subject to in Bolivia of 12.5% and New Zealand of 7.5%.
The GC EBITDA assumes both depletion of the current position to reflect the distress that provoked a default and a level of corrective action Fitch assumes would have occurred during restructuring or would be priced into a purchase price by potential bidders. The recovery analysis reflects a scenario in which EBITDA declines as a result of continued erosion of the subscriber base in Bolivia. This is due to aggressive price discounting by the larger, financially stronger competitors that causes a repricing of the subscriber bases and additional challenges for Bolivia, which could be due to a combination of country risk factors including political, social, economic and legal.
For the Bolivian operations, the LTM EBITDA as of March 31, 2021 was roughly USD5 million. Fitch believes the ongoing political instability and social unrest and competitive environment, combined with the negative effects from the coronavirus pandemic, provides limited clarity on the GC EBITDA. This increases the uncertainty around any assumptions for the ongoing enterprise valuation.
For the New Zealand operations, the going-concern EBITDA of USD89 million, represents around a 20% decline to EBITDA. The going-concern EBITDA considers 2degrees' good operating momentum that has steadily taken share with a good competitive position in New Zealand's stable three-player operating environment. The GC assumptions also considers the structural improvements undertaken and the depressed roaming revenue related to the coronavirus pandemic. Fitch believes the GC EBITDA represents the level of sustainable cash flow to support required investments for network infrastructure and the expected spectrum payments to maintain its competitive position.
Fitch views the multiple for NuevaTel based on the range of allowable multiples (2.0x to 6.0x) as below the midpoint for the Latin American region. The multiple reflects the challenges with the current uncertainty and instability in the operating/political environment, small player and the state of the company's business model, which experienced significant operational disruption and loss of market share during the past couple of years.
New Zealand's multiple of 6.0x which is at the upper end of the 2.0x to 6.0x recovery band for the APAC region reflects the 2degrees market position, growth prospects, good profitability, supportive industry dynamics and the country's better ranking, in creditor friendly policies, and general enforceability. The multiples compare with the U.S. Corporates 5.9x median Technology, Media and Telecommunications emergence enterprise value/forward EBITDA multiple.
For issuers with assets in multiple jurisdictions, the cap analysis is weighted by the country or countries in which the economic value of that issuer's business could be realized. When the country of incorporation of the parent company exhibits a lower cap than the average of the countries in which the preponderances of assets are located, the lower cap of the holding company's jurisdiction would apply only if Fitch believes the recovery process would be negatively affected, directly or indirectly, by any legal processes at the parent company level.
New Zealand is in Group A with no ratings cap while Bolivia is in Group D with a ratings cap of 'RR4'. Fitch has assumed no recovery value is available from NuevaTel based on the limited clarity and uncertainties discussed above. Consequently, given that Fitch's recovery contemplates that all of the economic value resides in the New Zealand operations, recoveries could be up to a 'RR1'.
The above assumptions result in a recovery notching for the $50 million TISP secured notes at 'RR1' and the $357 million TISP senior secured notes at 'RR4'.
ISSUER PROFILE
Trilogy is an internationally focused wireless telecommunications company with operations in New Zealand (2degrees) and Bolivia (NuevaTel).
SUMMARY OF FINANCIAL ADJUSTMENTS
Adjustments for factoring and outstanding handset receivables related to FS operations that Fitch brought back on balance sheet (assessed using a debt-to-equity ratio of 1x);
Fair value of debt adjusted to reflect debt amount payable at maturity;
Readily available cash excludes restricted amounts and cash in Bolivia;
In calculating leverage metrics, EBITDA is reduced to reflect any dividends to minorities.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
Trilogy International South Pacific LLC LT IDR CCC+ Affirmed CCC+
senior secured
LT CCC+ New Rating RR4
senior secured
LT B+ Affirmed RR1 B+
Trilogy International Partners Inc. LT IDR CCC+ Affirmed CCC+
Trilogy International Partners LLC LT IDR WD Withdrawn CCC+
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
TRILOGY INTERNATIONAL PARTNERS INC. 