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Recently, NII Holdings Inc. (NIHD - Analyst Report) suffered a setback as credit rating agency Standard & Poor’s Ratings Services (S&P) downgraded the company. NII Holdings’ corporate credit rating was lowered from “B+” to “B” and its senior unsecured debt rating was lowered from “B” to “B-.“ However, S&P maintains its stable outlook for the company.

We believe the primary reasons for this rating downgrade was NII Holdings’ dismal performance in the second quarter of 2012 and reduced outlook for the rest of 2012. Estimate for net subscriber addition for fiscal 2012 was reduced from 1.4 million to 1 million.

Full-year 2012 operating revenue is now estimated at $6.1 billion compared with $7.1 billion estimated earlier. Similarly, newly projected consolidated OIBDA is $1 billion in contrast with $1.4 billion projected earlier.    

Management cited massive fluctuations of foreign currency rates, lower average revenue per user (ARPU), higher costs for deploying 3G networks, and aggressive competition from large wireless carriers, such as America Movil S.A.B. (AMX - Analyst Report) and Telefonica S.A. (TEF - Analyst Report) in the Latin American markets are the main factors for disappointing future outlook.

Nevertheless, NII Holdings has taken four steps to revamp its business model. These include: (1) deployment of nationwide 3G wireless networks in Mexico, Brazil, and Chile in 2012 (2) enhancement of iDEN network and integration of this technology with 3G wireless technology (3) enhancement of its brand value through inclusion of more retail outlays and expanding the existing distribution channels (4) using state-of-the-art IT technologies to develop an innovative back-office, which will enhance the productivity and efficiency of its employees to properly service its clients.

We believe these restructuring activities along with a reduction in 3G network roll out costs may improve the company’s operating margin in 2013. We maintain our long-term Neutral recommendation on NII Holdings. Currently, it holds a Zacks #3 Rank (Hold) on the stock.

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