Fitch Affirms Alestra's Ratings, Revises Outlook To Negative

Business Wire, Nov 10, 2005

MONTERREY, Mexico -- Fitch Ratings has affirmed Alestra's, S. de R.L. de C.V. (Alestra) foreign and local currency ratings at 'B-' and has revised the Rating Outlook to Negative from Stable. The rating action applies to approximately $387 million of debt, including $304 million senior notes due 2010, $46 million senior notes due 2009, and $37 million senior notes due 2006.

The revision of the Rating Outlook to Negative reflects several developing factors that may affect the business risk profile of Alestra over the next 12 to 24 months. These factors include increased competition in data, internet, and local services (DILS) which, while expected to grow, may not fully compensate for eroding long-distance revenues and cash flows; and the uncertainty of Alestra's long-term ownership structure and the future use of the AT&T brand name, given the potential change in ownership due to the SBC Communications' (SBC) acquisition of AT&T Corp, which owns 49% of Alestra. Increased competition and/or the loss of the use of the AT&T brand name could weaken Alestra's expected financial performance.

The ratings continue to reflect Alestra's business position as a niche provider of long-distance, data, and local service catering to the Mexican corporate sector and an improved financial profile following the recapitalization and debt restructuring completed during November 2003. The ratings also incorporate the challenges in the long-distance market, and Alestra's high leverage and medium to long-term refinancing concerns. These concerns are mitigated by an increased contribution of the DILS segment in the consolidated revenue mix that has helped stabilize EBITDA and credit protection measures since the restructuring.

The company continues to face competitive challenges posed by the leading telecommunications operator, Telefonos de Mexico (Telmex). Currently, Telmex controls over 90% of the local exchange sector, 70% of the long-distance sector, and has a substantial share of the data sector. Competition in the international and domestic business remains intense as prices continue to trend down. The elimination of the proportionate return rule in August 2004, significantly affected Alestra's incoming international long-distance tariffs and revenues, but this impact has been partially offset by higher long-distance gross margins. For the first six months of 2005, ILD revenues decline 63% vis-a-vis 2004. For this period, total long-distance revenues and EBITDA declined 49% and 19%, respectively, when compared with the same period of 2004, while gross margins have increased to 53% from 34% as the company has concentrated efforts to grow higher margin traffic. Competition is expected to pressure future long-distance margins.

The company has achieved stability in consolidated EBITDA and cash flow over the past two years despite eroding long-distance revenues. For the first six months of 2005, total consolidated EBITDA has remained relatively unchanged when compared with the six months ended in 2004, despite the 30% decline in consolidated revenues as growth in DILS revenue has offset for declines experienced in the long-distance segment. Over the medium term, Alestra's main challenge will be to successfully grow its existing DILS operations at a pace that will offset continued pressure in the long-distance segment and maintain EBITDA levels.

SBC's pending acquisition of AT&T, once completed, adds uncertainty to Alestra's long-term branding rights as well as ownership structure. Following the AT&T acquisition, SBC will own noncontrolling stakes both in Telmex and Alestra, 21% voting interest in Telmex and 49% voting interest in Alestra. Uncertainty of SBC's ultimate investment strategy in Mexico and the Mexican antitrust authority's (COFECO) view of SBC duel ownership interest in the telecommunications sector adds risk. The possible loss of a strategic minority investor, which provides technological and branding support through the usage of the AT&T brand, could pressure financial performance and credit quality. Alestra senior notes due 2010 are puttable at 101% of face value in an event of change of ownership; SBC's acquisition of AT&T is not expected to trigger this put.

Alestra's credit protection measures have remained stable since late 2003. Leverage remains high, with total debt to EBITDA of 4.0 times (x) while interest coverage ratio of EBITDA to gross interest expense at 2.4x. Total debt as of the second quarter of 2005 amounted to US$394 million, composed of US$304 million senior notes due 2010 with an amortization schedule with increased principal payments, US$37.1 senior notes due 2006, US$45.1 million senior notes due 2009, and US$7.4 million capital leases; although the company liquidity position is strong and should be able to meet debt maturities over the next few years. The company will likely need to refinance some its maturities in 2009 and 2010.

Alestra's business strategy is to focus increasingly on the DILS segments to offset a reduction in the long-distance business. The data services business offers significant long-term growth opportunities due to its low penetration in Mexico. This segment now accounts for around 50% of revenues compared with 14% in 2001 and is expected to continue increasing as a percentage of revenues. Alestra strategy over the past five years has resulted in shifting away its revenue mix from consumer business towards enterprise and international business segments. Alestra began offering local services in the three largest metropolitan areas during 2001 and has since increased coverage to smaller cities.