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Monday, May 29 2017 @ 03:05 PM AST

Operating weakness should be already priced in to TV Azteca bonds: Oppenheimer

TV Azteca (TZA) bond valuations have been affected by a combination of weak results, the impact of the weaker peso and perhaps negative implications of the indirect involvement of Grupo Salinas and its bank, Banco Azteca, in Cobre del Mayo (COBREM), Oppenheimer said in a note last week.

Oppenheimer Analyst Omar Zeolla wrote: "Despite these poor optics, I believe TZA bonds are trading too wide against comparables given its BB- rating and underlying credit quality, TZA ‘20s (rated BB-) trading at spread levels above single B rated Mexican corporates. Perhaps the best comparable is JAVER, rated B2/B+/B+, with similar exposure to the local economy (MXN revenues, US$ debt), similar net leverage (2.4x for TZA, 2.8x for JAVER), and adequate liquidity with high cash balances relative its short term debt. JAVER has minimal short term debt and TZA has none after repaying its ECP at maturity in September; as of 2Q15 cash to short term debt was 5x for TZA. JAVER ‘21s are trading at 822bps Z-spread and 9.2% yield, compared to TZA ‘20s 1,100 Z-spread and 12% yield. JAVER is also a smaller company in terms of revenues and EBITDA. Grupo Posadas (POSADA) ’22 (B2/B/B+) is also trading around 810bps Z-spread and 9.6% yield, although POSADA has higher US dollar linked revenues, its net leverage is higher at 3.3x and EBITDA margin is lower. TZA ‘20s are trading even above the spread/yield levels AXTEL ‘20s were trading prior to the ALESTRA merger announcement (1,000bps Z-spread, 11% yield). Based on these comparables, it seems TZA ‘20s should be trading tighter, closer to the 10% - 11% yield range.

"Despite weaker results and the implications that could bring to TZA’s BB- rating, its notes are already trading at weak Mexican single-B levels. Liquidity should continue to be adequate, the company faces no short term debt after repaying the ECP and the next significant maturity is the $300mm 2018 notes.

"Major factors affecting TZA include the weakness of the Mexican Peso (TZA earns in local currency and all of its debt is US dollar denominated), and a reduction in advertising revenue, especially compared to last year’s World Cup related surge. TZA is also being negatively impacted by advertising allocation moving from broadcast TV to other media and the introduction of a new broadcaster in Mexico. Despite this, investors should consider that public broadcast TV continues to be the most widely accessible means of entertainment in Mexico, and therefore should continue to benefit broadcasters, as they represent the most efficient means of advertising. I expect the company to announce new strategies to improve its revenues, including actions to improve its operations in Colombia, possibly when third quarter results are released in a couple of weeks. In 2Q15, revenues and EBITDA declined 8% and 56% y-o-y, respectively in local currency terms. It’s net leverage is likely to rise from the latest 2.4x due to Mexican Peso (MXN) weakness and some of the same trends prevalent in 2Q15, in addition to the negative impact likely to be seen from the free time broadcasters are required to give to political campaigns which occurred in the third quarter. Liquidity should remain adequate despite the negative MXN 200mm ($13mm) in free cash flow for the first half of the year, since there are no debt maturities before 2018 and cash balances should be over $260mm after the repayment of the $75mm Euro Commercial Paper in September.

"An additional concern in investors’ minds has been Grupo Salinas’s involvement in COBREM. TZA as part of Grupo Salinas, is at risk of being impacted by the Group’s involvement. The Group has indirect shareholding interest in the mining company COBREM which is currently at risk of missing its next coupon payment on November 15th, and its bank, Banco Azteca, is a lender to COBREM, although it had recently cancelled its line of the credit to the company. Grupo Salinas may support its mining company at the expense of other companies in the group, increasing the risk to TZA’s credit, but at the same time, support may come from the Group to TZA if eventually needed.

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