Long distance operators Alestra, 49% held by AT&T, and Avantel, an affiliate of WorldCom, are facing liquidity problems as they struggle to finance expansion and meet current debt payments. The refusal of Mexican lawmakers to increase the 49% foreign ownership restriction makes it difficult for the companies to access the capital required to expand their network infrastructure to compete effectively with Telmex, which continues to generate cash, more than $920 million in the last quarter. Telmex, which generates 35% of its income from long distance, has approximately 75% of the long-distance market.
Alestra's access to debt was further restricted when investment analysts rated the firm's debt as unattractive. Analysts pointed out that Alestra needs $32 million in new funds to meet obligations this year, but generated only $9 million in free cash flow in the first quarter. S&P lowered its credit rating on Alestra citing deteriorated liquidity, solvency concerns, incipient volume growth, very high debt, and unclear financial support from shareholders.
When Moody's Investors Service slashed $432 billion in WorldCom debt to junk status, it clearly signalled that Avantel could also face financing difficulties, despite the 55% interest held by Banamex (Citigroup). The lower international connection rates negotiated with Telmex earlier this year will reduce costs for both Avantel and Alestra, thereby allowing the companies to increase their profit margins.
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