NIHD Analysis 8/22/07
NIHD 2.75% converts with a put in 2010 are attractive. 157.375 vs. $71.75 conversion price $50. 14.11pts/9.85% premium. Using credit of L+150, get bond floor of 90. Crosses par 2.75% up 25%…iv 38.7. We have definitely seen a volatility spike in this name. Currently, 1/09 50 calls 44.21-48.8 vol and 1/09 50 puts 44.31-48.71. vol 1/10 50 calls 42.42-51.8 vol 50 puts 40.47-49.46 vol although not much liquidity.
Business Description
NII Holdings (NIHD) is a cell phone operator of Nextel’s push to talk technology inLatin America. The company generates their sales and EBITDA in the following countries.
| Country | % sales | %EBITDA | Subscribers |
| Mexico | 57% | 64% | 1.4M |
| Brazil | 23% | 17% | 826,000 |
| Argentina | 14% | 15% | 608,000 |
| Peru | 6% | 4% | 320,000 |
NIHD’s customers are high-end business customers with average monthly price per user (ARPU) of $58, compared to $14 for its peers. The company’s churn rate (loss of customers) is also very low at 1.6%. Along with subscriber growth, ARPU and churn are the three most important metrics to gauge the health of the company.
NIHD’s customers are 100% business users and 100% postpaid, which gives the company a strong credit, low turnover, customer base resulting in steady revenues and cash flow.
The company is the only company to offer push to talk technology in its regions but indirectly competes with bigger, more established cell phone companies who cater to the mass market. InMexico, NIHD competes with Telcel (owned by America Movil) and Movistar (owned by Telefonica Moviles). InBrazil, competitors are Vivo (owned by Telefonica and Portugal Telecom), TIM (Telecom Italia), and Claro (America Movil). InArgentina, competitors are Movistar (Telefonica) Personal (owned by TelecomArgentina) and CTI (America Movil). InPeru, competitors are Movistar (Telefonica) and America Movil.
Volatility
The stock has moved 2-6% in the last few earnings reports. In the last two months, realized vol. has picked up due to its exposure to emerging markets.
Risks
1) NIHD operates in emerging market countries with big exposures toMexicoandBrazil. Any economic problems in these countries could lead to customer defections.
2) It is worth noting that NIHD was in bankruptcy in 2001 before emerging from bankruptcy in November 2002. Back then, the company was saddled with high levels of debt from buying spectrum and building out the network and had a much smaller customer base. Since then, cell phone penetration has to nearly 70% in their served regions and spectrum and network needs are minimal.
3) NIHD needs to continue to provide good service and execute well on its business plan. Any significant service problems could cause users to go to competitors.
Financials
At $76, the company’s market cap is $13B.
NIHD has $1.4B in cash and the following debt
$1.2B NIHD 3.125% due 2012
$350M NIHD 2.75% with a 2010 put
$450M Mexican syndicated debt
The company turned FCF positive in 1Q2007. For the full year 2007, NIHD is expected to generate $100M in FCF, going up to $350M 2008.
We are using 150+L for the converts with 2010 put (3 years). NIHD is not rated but credit metrics show that NIHD is in the BBB range.
| A | Baa | Ba | B | Caa | ||
| A | BBB | BB | B | CCC | nihd | |
| 5 year spread over Tres (8/07) | 118 | 154 | 290 | 407 | 657 | |
| EBIT/Interest Coverage | 6.1x | 3.7x | 2.1x | 0.8x | 0.1x |
4.1 |
| EBITDA Interest Coverage | 9.1x | 5.8x | 3.4x | 1.8x | 1.3x |
10.3 |
| Debt/EBITDA | 1.6 | 2.3 | 3.4 | 4.9 | 6.3 |
2.0 |
| Debt/Capital | 42.5 | 48.2 | 62.6 | 74.8 | 87.7 |
64.1 |