NEW YORK-Consorcio Ecuatoriano de Telecommunicaciones S.A., Ecuador’s largest cellular carrier, “may not be able to maintain access to sufficient capital to fully execute its business plans,” Moody’s Investors Service said.
Doing business as Conecel, the Quito-based wireless services company offers analog and digital cellular service under the “Porta” brand name. It had 104,061 cellular subscribers as of Dec. 31, representing market penetration of less than 1 percent but also about 65 percent of all cellular customers in Ecuador.
The carrier, which launched service in 1994 under a 15-year renewable license, reported revenues of $75 million at the end of 1997, up from about $29.8 million in 1996. Approximately 95 percent of Conecel’s 1997 revenues were attributable to its cellular operations.
Besides conventional cellular service, Conecel also offers public pay phones using cellular technology. By the end of last year, it had 1,440 such phones in operation, each of which generated average monthly revenues of about $110 and had an average payback period of 18 months. All of its cellular pay phones operate using prepaid calling cards.
In mid-April, political and currency risks caused the carrier to scrap plans for an initial public offering of 6.8 million American Depository Shares, each representing four shares of Class B common stock, in a price range of $13.50 to $15.50 each. It did so after scaling down the size of the deal from the 9.2 million ADS planned, according to Conecel’s IPO filing with the Securities and Exchange Commission. Nasdaq National Market had approved listing the ADS before Conecel killed the planned equity offering.
After canceling the ADS sale, Conecel said it would seek to meet its capital requirements, “through an alternative financing strategy in the high-yield (debt) and private equity markets (with) Lehman Brothers (Inc.) acting as financial adviser.”
Moody’s attached a “negative outlook” caveat in assigning first-time, speculative grade ratings of B3 to two recent private placements of debt: B3 to Conecel’s $125 million in senior notes due 2002; Caa1 to Conecel Holdings Ltd.’s $121 million in senior notes due 2000. The holding company owns an 85-percent equity stake in the carrier.
Despite this new infusion of borrowed money, the carrier and its holding company may not be able “to adequately address their capital needs, leaving bondholders exposed to operating and sovereign risks,” the rating agency said. This concern is the rationale for the “negative outlook” it assigned to the two debt issues.
“Twice in the last 18 months, Conecel has been directly impacted in its operations by political and monetary policy events … (highlighting) the strong linkage to sovereign risks, despite Conecel’s debt rating being two notches below the country ceiling for foreign currency bonds and notes,” said M.J. Subhas, managing director, and Douglas Bontemps, senior analyst, of Moody’s corporate finance group.
The agency is conducting a review for possible downgrade of Ecuador’s B1 foreign currency notes and bonds ceiling that is “driven by political and economic factors which may, in time, have ramifications for the ratings assigned Conecel and Conecel Holdings,” they said.
Competition is the other threat to Conecel. BellSouth Corp. controls the cellular carrier’s major competitor, Otecel.
“Due to its ownership, Otecel may have greater financial and other resources than Conecel, providing it with a competitive advantage,” Subhas and Bontemps said.
The Parra family, a prominent Ecuadorian family holding banking, construction, real estate and agricultural interests within the country, owns Conecel Holdings outright. MasTec Inc., a Miami-based telecommunications, engineering and construction company, owns 10 percent of the carrier, Conecel.
“Conecel also faces competition from other existing wireless services, [like] mobile radio and [paging], and may face competition from emerging technologies [like] specialized mobile radio and personal communications services,” the Moody’s analysts said.
Adinatel S.A. and Pacifictel S.A., two regional wireline telephone operating companies formed late last year in anticipation of state-owned Emetel’s privatization, can bid on PCS licenses in their regions when the federal government auctions them.
