Bloomberg News

AT&T’s Exit Pushes Alestra Borrowing Costs Higher: Mexico Credit

June 14, 2011

June 14 (Bloomberg) -- AT&T Inc.’s sale of a 49 percent stake in Alestra SA is sparking losses in debt issued by the Mexican phone-service provider that are leaving it out of a corporate bond rally.

Yields on Alestra dollar bonds due 2014 have jumped 23 basis points, or 0.23 percentage point, to 6.17 percent since AT&T said April 15 it will sell the stake to its joint-venture partner, Alfa SAB. Average yields on Mexican corporate dollar debt fell 10 basis points in the period to 6.20 percent, according to data from JPMorgan Chase & Co.

Alestra stands to lose contracts that were brought in by AT&T, the biggest U.S. phone carrier, and will miss its business expertise and global presence, according to Moody’s Investors Service. AT&T is now free to partner with other local telecommunications providers to win corporate communications clients.

“Our big question was about the competitive environment,” Nymia Almeida, a Moody’s analyst in Mexico City, said in a telephone interview. Moody’s changed the outlook on Alestra’s B1 rating to negative from stable after the AT&T move. “What’s going to happen when their partner becomes a competitor? That’s the big doubt that made us a little more conservative with the rating.”

Alestra’s revenue will decline next year, Moody’s said, without providing a specific forecast. Revenue dropped every quarter in the year through the first half of 2010. It rose 10 percent to $96 million in the first quarter of 2011. The company didn’t provide a full-year revenue forecast for this year.

Alfa Subsidiary

Alfa, the San Pedro Garza Garcia-based group that also makes auto parts and processed foods, founded Alestra with AT&T in 1995. The company focuses on providing phone, Internet and data to corporate customers.

AT&T is set to complete the sale of its Alestra stake this month, according to the April 15 statement. Financial terms weren’t disclosed.

AT&T subsidiary AT&T Global Network Services, known as AGNS, will offer services to clients in Mexico through partners, including Alestra, that have the necessary network infrastructure, spokeswoman McCall Butler said in an e-mailed response to questions.

“Although Alestra will be a key transport infrastructure supplier to AGNS Mexico, AGNS Mexico and Alestra may compete for enterprise consumers’ business,” she wrote. “This promotes competition for such services in Mexico.”

Alestra will struggle to attract new customers without the cachet of AT&T behind it, Moody’s said.

“What they have to do is define their long-term strategy and how they’re going to consolidate their position in the market,” said Araceli Espinosa, a debt analyst at Scotia Capital in Mexico City. “It’s not going to be easy.”

Debt Default

The company negotiated with bondholders to extend maturities and lower interest rates as part of a restructuring plan in 2003, a year after it defaulted on $570 million of debt.

“Alestra is a financially solid company that generates consistent and growing cash flow, and has been capable of financing its growth plan with internal resources and servicing its debt,” Enrique Flores, Alfa’s investor relations chief, said in a telephone interview.

Alestra will still work with AT&T and the loss in revenue will be offset in part through that continued relationship and with internal growth, Alestra spokesman Sergio Bravo said.

Slim’s Dominance

“We expect that it will be compensated for and that there won’t be a material impact,” he said.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries narrowed 9 basis points to 136 at 5:18 p.m. New York time, according to JPMorgan.

Yields on futures contracts for the 28-day TIIE interbank rate due in December were unchanged at 5 percent. The peso rose 0.5 percent to 11.7971 per dollar.

The cost to protect Mexican debt against non-payment for five years fell three basis points to 106, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Regulators’ efforts to end billionaire Carlos Slim’s dominance in the telecommunications market are helping Alestra cut costs, offsetting in part the loss of AT&T, said Robert Claiborne, head of credit research at Cutwater Asset Management Corp., which oversees about $40 billion of fixed-income assets, including Alestra bonds.

Connection Fees

Mexican officials have sought to reduce the fees Slim’s America Movil SAB charges to connect calls coming from lines owned by other providers. The Federal Telecommunications Commission ruled in March that Alestra should pay America Movil a rate of 39 centavos a minute to connect such calls, less than half the rate America Movil was seeking.

“We’re still comfortable with the credit,” Claiborne said in a telephone interview from Armonk, New York. “We’ve seen pretty good growth in the data and internet services business of the company.”

An America Movil official who asked not to be named in accordance with company policy declined to comment. Alestra’s consolidated earnings before interest, taxes, depreciation and amortization -- a measure of profit known as Ebitda -- increased 19 percent to $32 million in the first quarter, led by services including data and Internet. Alestra’s net debt-to-Ebidta ratio fell to 1.42 times in the period, from 1.96 in the same quarter last year.

Ebitda Forecast

Ebitda will climb 8.5 percent to $127 million this year, according to the spokesman Sergio Bravo, who said the profit measure is increasing faster than an original 2011 forecast of $123 million.

Scotia Capital’s Espinosa said the company needs to prove it can expand its business without a key strategic partner.

“Lower tariffs alone can’t generate more cash flow,” Espinosa said. “We have to see if what they’re saving in payments is going to be enough to move the company forward. I don’t think so.”

--With assistance from Thomas Black in Monterrey and Andres R. Martinez and Crayton Harrison in Mexico City. Editors: Brendan Walsh, David Papadopoulos

To contact the reporter on this story: Jonathan J. Levin in Mexico City at

To contact the editor responsible for this story: David Papadopoulos at

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