Fitch Affirms Sitios Latinoamerica IDR at 'BBB-'

By Fitch Ratings

Wed 04 Sep, 2024 - 10:34 ET

Fitch Ratings - New York - 04 Sep 2024: Fitch Ratings has affirmed Sitios Latinoamerica S.A.B. de C.V.'s (Sitios) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-', and affirmed the unsecured debt rating at 'BBB-'. Fitch Ratings also affirmed the 'BBB-' rating of Sites del Peru S.A.C.'s Peruvian sol-denominated senior unsecured notes guaranteed by Sitios, Torres Latinoamerica, S.A. de C.V. and Torres do Brasil S.A., the same guarantors as Sitios' senior unsecured bond. The Rating Outlook is Stable.

The rating affirmation reflects the company's anticipated improvement in net leverage and its strong market position in Latin America as the second largest telecom provider. This position is bolstered by its affiliation with América Móvil S.A.B. de C.V. (AMX; A-/Positive) as the main anchor. In addition, the company demonstrates good profitability, driven by high recurring contractual revenue associated with its tower business model.

Key Rating Drivers

Strong Anchor Tenant, Geographical Diversification in Latin America: The ratings reflect strong strategic and operational ties to AMX, whose operations accounted for around 85% of Sitios' total individual site agreements revenue in the first half of 2024. Sitios' passive infrastructure is critical to AMX's mobile operations in Latin America.

Sitios and AMX share the same ultimate controlling shareholder, the Slim Family, which aligns the companies' strategic interests and therefore limits payment and churn risks. Sitios operates in Brazil, the Andean Region, Central America, AUP (Argentina, Uruguay, Paraguay) and the Caribbean markets. Brazil is its largest operation, with 32% of total towers as of the second quarter of 2024.

Steady Cash Flow from Tower Lease Contracts: Sitios' ratings are supported by its diversified, stable and sustainable operating performance. Revenue is predictable, backed by long-term contracts of 10 years (with an additional 10-year renewal) with revenue covered by contractual escalator indexed to inflation or fixed rates. About 48% of total tower revenue was in U.S. dollars in the first half of 2024, except for Brazil, Chile, Colombia and Peru, where contracts are denominated in local currency.

The company operates a pass-through model regarding ground lease payments for all its properties, which reduces margin pressure. The modular capex allows flexibility in its tower allocation plan and cash flow management. The company can alter or defer its growth plan relatively easily in case of an unexpected change in demand or a regulatory environment that negatively affects its operations.

Lower Leverage Expected: Fitch expects net leverage to decrease gradually, driven by higher EBITDA from organic growth. Net leverage is projected to be close 7x in 2024 (7.47x as of the first half of 2024) and below in 2025. Fitch expects Sitios' EBITDA, excluding ground leases, to reach about MXN 8 billion in 2024, with MXN 3.9 billion as of the first half of 2024 driven by new towers built and contract escalators. Fitch does not forecast any dividend payments in 2024 and 2025 as the company aims to deleverage.

Growth Model: The tower industry benefits from wireless carriers' investments in 5G, as well as continued investments in 4G networks to meet the rapidly growing demand for mobile broadband services. Wireless companies have densified their networks to increase data capacity and speed to support consumer demand. The development of 5G in the near term and throughout Latin America in the long term is expected to support tower demand.

The company has a tenancy ratio of 1.21x as of the second quarter of 2024 and aims to build about 1,500 new towers (built to suit) in 2024, with 643 new towers built in the first half of 2024. Fitch estimates a total investment in 2024 is expected at about USD130 million in 2024.

Derivation Summary

Sitios and other digital infrastructure operators have operating profiles with high visibility and stability of rental income based on passive infrastructure and long-term contracts, offset by underlying asset specificity that affected liquidity of sale. The tower industry employs a stable business model and experiences much lower business risk than many business models within the telecommunication segment. Companies in this industry benefit from greater foresight of revenue and long-term costs than telecommunications operators.

The Latin American telecom tower industry is growing, with three major participants besides mobile operator owned infrastructure: American Tower Corporation (AMT; BBB+/Stable), SBA Communications Corporation and Sitios. Sitios' counterparty risk is concentrated in a high credit quality customer when compared with other global peers in the industry, such as AMT and Crown Castle Inc. (BBB+/Negative), which have a more diversified revenue base.

Operadora de Sites Mexicanos, S.A.B. de C.V. (Opsimex; BBB/Positive), which shares the same controlling shareholder as Sitios, benefits from a strong market position in Mexico, where it operates the largest wireless mobile communication tower portfolio. Opsimex has lower leverage, although it has lesser geographic diversification.

Key Assumptions

Fitch's key assumptions within our rating case for the issuer include the following:

--Tower revenue supported by tower growth as result of built-to-suit;

--Tenancy of about 1.2x in 2024;

--Capex of about USD130 million based on new tower built in 2024 (mostly with AMX);

--No dividend payments in 2024 and 2025;

--No acquisitions;

--Adjusted net debt/EBITDA toward 7x in 2024.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

-- Continued favorable industry trends and operational ties with AMX;

-- Sustained leverage, measured as net debt/EBITDA, below 5.5x over the long term;

-- Increased tenancy ratio;

-- CFO-capex/debt above 12%;

-- Interest coverage sustained above 3.0x.

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

-- Sustaining a leverage ratio consistently above 7.0x;

-- Operating performance that falls short of Fitch's expectations;

-- Revenue and margin erosion due to the economic and competitive environment.

Liquidity and Debt Structure

Manageable Liquidity: Sitios had cash of MXN1.7 billion and short-term debt of about MXN3.3 billion as of 2Q24. Fitch expects the company to be able to roll over or refinance short-term debt. The company does not face significant debt amortizations until 2025, when MXN 9.4 billion (USD515 million) of bank debt is due. Liquidity is supported by long-dated contracts that provide revenue and cash flow visibility.

Issuer Profile

Sitios operates in 16 countries in Latin America, where it is primarily engaged in the construction, installation, maintenance, operation and commercialization of Passive Infrastructure. Sitios owns Passive Infrastructure in 16 of those countries: Argentina, Brazil, Chile, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay, Peru, Puerto Rico, Uruguay and Colombia.

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.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.