OREANDA-NEWS. Fitch Ratings has affirmed the Long-term foreign-currency Issuer Default Ratings (IDRs) for Atento LuxCo 1 S.A. (Atento) at 'BB' with a Stable Outlook. Fitch has also affirmed Atento's USD300 million senior secured notes at 'BB.'

KEY RATINGS DRIVERS

The ratings reflect Atento's third-largest market position in the global customer relation management (CRM) industry with a well-established long-term client relationship and geographical diversification. This has enabled the company's stable business growth and should continue to support stable EBITDA generation over the medium term under the solid industry growth outlook. Negatively, the ratings are tempered by the intense competitive landscape amid sluggish economic conditions, and a high customer concentration risk.

Stable Growth Outlook:
Fitch expects Atento's EBITDA generation to maintain its solid growth momentum, on a local-currency basis, in most of its operational geographies backed by the increasing demand for CRM/BPO (business processing outsourcing) services. Although the competitive landscape is intense due to new entrants and price-based competition for low-end services, the company's well-established market leading position as well as its increasing scope of advanced product offerings should help mitigate this risk and enable stable growth over the medium term. During the third quarter of 2015, Atento's advanced solution services represented 24% of total revenues.

During the first nine months of 2015 (9M15), Atento's revenues grew by 10% on a constant currency basis, despite subdued economies, especially in Brazil. The company has continued to acquire new clients while also successfully expanding the scope of its service offerings with existing clients. Ongoing local currency depreciation could continue to negatively affect USD-based reported financials, but the impact should not be material, as its revenue and operating costs are well-matched in local currencies in its operational geographies. In addition, the company does not face any sizable USD debt maturity until 2020.

Negative FCF:
Fitch forecasts Atento to generate negative free cash flow (FCF) in the short term due to a material increase in its working capital requirement, mainly due to contract renegotiation with some of its main clients. The company's account receivables have notably increased during the last 12 months (LTM) ended Sept. 30, 2015, suppressing its cash flow from operations (CFFO) to just USD21 million, a sharp decrease from USD135 million in 2014. As Atento's capex could hover at around USD90 million-USD100 million a year, a failure to turn around its working capital burden could pressure its FCF generation into negative territory in the short term.

Stable Leverage:
Despite projected negative FCF generation, Fitch forecasts Atento's net leverage to remain stable at close to 3.0x over the medium term. While recent unfavorable FX movement has largely diluted the company's solid growth in local currency EBITDA generation, the outstanding amount of its local currency-denominated debt, mainly in Brazil, has also decreased. As a result, total gross debt fell to USD572 million as of September 2015 from USD653 million at end-2014.

A downward trend in rental expenses has been positive, leading to a lower level of off-balance-sheet debt. Fitch forecasts rental expense to represent about 4% of the company's total sales, compared to 7.9% in 2010, driven mainly by the company's relocation of its work stations to less expensive sites. As of September 2015, Atento's adjusted net leverage was 3.3x, which compares to 3.6x at end-2014.

Stable Operating Margins:
Fitch forecasts Atento's EBITDA margins to remain stable over the medium term, in line with 2014's level of 11.3%, excluding the one-off IPO-related cost, backed by cost reduction initiatives despite inflationary pressures. The company has coped with increasing labor costs, the highest component of its cost structure, representing 72.5% during first nine months of 2015, by working station relocations. Atento has also taken other cost-cutting measures such as centralized procurement of operating equipment, and IT system transformation to improve productivity. The company's EBITDA margin was 11.5% during the 9M15.

Mitigated Customer Concentration Risk:
Atento is exposed to a significant customer concentration risk as it generates over 45% of total revenues from its largest client, Telefonica Group. Positively, Fitch believes that this risk is alleviated by the service agreement with Telefonica which guarantees an inflation-adjusted revenue threshold until 2021 along with the ongoing expansion of its non-Telefonica client base, enabling stable cash generation. In addition, the company boasts well-established long-term relationship with its clients, as it generates close to 90% of its total revenue from clients who have contracted with Atento for more than five years.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include
--Ongoing FX volatility to result in negative revenue growth in the short term
--EBITDA margin to remain in the range of 11%-12% over the medium term despite inflationary pressures due to the cost saving initiatives
--Capex-to-sales ratio to gradually fall to below 5% over the medium term
--Negative FCF generation in the short term, due to a large working capital requirement
--Adjusted net leverage to remain close to 3.0x over the medium term.

RATING SENSITIVITIES

Negative rating action can be considered in the case of an increase in net debt-to-operating EBITDAR toward 4.0x on a sustained basis, caused by a decline in operating margins and slower revenue growth in a sluggish economy, and/or continued negative FCF, partly due to a continued high working-capital burden. In addition, the ratings could be pressured should the company's readily available cash plus CFFO-to-short-term debt ratio fall below 1.5x.

Conversely, Positive rating action could be considered should the company continue its strong growth momentum over the medium term. Improvement in key operational metrics, such as reduced customer concentration, and higher diversification into and penetration of advanced solution offerings, as well as consistent positive FCF generation leading to its net leverage falling close to 2.5x on a sustained basis could also be positive for the ratings.

LIQUIDITY

Atento retained a sound liquidity profile as of Sept. 30, 2015, as its consolidated readily available cash (USD175 million) comfortably covered its short-term debt of just USD25 million. In addition, the company held an undrawn credit facility of 50 million euros. Fitch does not foresee any liquidity problem given the company's long debt maturities schedules.