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Credit Quality, Consolidation, And The Impact Of Macroeconomic Conditions On Brazil's Internet Service Providers

Key Takeaways

  • Brazil's fixed broadband sector is rapidly growing, with independent internet service providers holding 57% market share.
  • High interest rates and inflation present challenges, but established ISPs' service quality provides a competitive advantage.
  • ISPs have been delivering uneven financial performance due to capital intensity and macroeconomic challenges, and rising leverage levels among ISPs have led to negative rating actions, stressing the need for financial stability.
  • We expect the market to continue consolidation, with financially stronger ISPs likely to acquire smaller competitors.

Brazil's fixed broadband sector has emerged as one of the fastest-growing segments in telecommunications. With approximately 20,000 independent internet service providers (ISPs), predominantly small to midsize companies, the market is characterized by a mix of informal operations and varying service quality.

Currently, independent ISPs hold about 57% of the market share, reflecting a shift in dynamics as these companies focus on enhancing network and service quality to retain customers. We rate the nine largest ISPs in Brazil, with national scale ratings ranging from 'brAA+' to 'brBBB', highlighting the diversity in operational focus among these providers. This group includes ISPs with a regional focus, such as Unifique and Brisanet, which have successfully expanded their operations through organic growth in the South and Northeast regions of Brazil.

In contrast, ISPs like Desktop and Giga Mais Fibra have strategically targeted the countryside and coastal cities of São Paulo, for example, while larger integrated players like Telefônica Brasil (brAAA/Stable/--) dominate more competitive urban markets.

Chart 1

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Our Coverage: Ratings Publications (ISPs)

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Operating And Financial Highlights

The financial performance of the ISPs we rate has been uneven over the past couple of years, particularly concerning EBITDA and cash flow generation amid a changing macroeconomic environment.

The capital-intensive nature of telecommunications necessitates ongoing investment in infrastructure and technology. ISPs with strong internal cash flows and diversified funding sources are better positioned to navigate economic challenges. Recent trends indicate a shift from heavy capital expenditures toward optimizing existing networks, which is crucial for sustaining growth and maintaining a healthy capital structure.

Looking ahead to 2025, we anticipate a continued slowdown in investment, focusing primarily on connecting existing homes and technology.

Challenges Of Capital Intensity And Leverage

The capital-intensive nature of the industry has led to increased leverage among ISPs, particularly as many have turned to infrastructure debentures to finance growth. This has resulted in a mismatch between rising debt levels and EBITDA generation, leading to negative rating actions for some companies.

Notably, Algar Telecom faced challenges in 2024, prompting a downgrade due to higher leverage and internal issues affecting its financial reporting. Similarly, Ligga has experienced two downgrades despite its leadership in the state of Paraná, highlighting the ongoing struggle for ISPs to balance growth with financial stability.

We have also taken positive rating actions driven by improvements in key metrics. We revised our outlook on Triple Play's to stable from negative and upgraded Brisanet to 'brAA-' from 'brA+', with a stable outlook. Brisanet has consistently demonstrated revenue growth, sustained margins, and relatively low leverage, aligning with our expectations.

Our overall view for ISP ratings is stable, except for Algar Telecom and Ligga, with high leverage remaining the main downward trigger.

Chart 2

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Chart 3

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Chart 4

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Chart 5

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Consolidation Trends And Financial-Sponsor Ownership

We expect the fixed broadband market to see continued consolidation as ISPs seek scale to enhance competitiveness. While we had anticipated more consistent mergers and acquisitions (M&A) in 2024, macroeconomic conditions have slowed this trend. A significant development occurred in 2023 with the merger of Vero S.A. and America Net S.A., resulting in a stronger independent player in the market.

Additionally, four ISPs we rate have financial sponsors as part of their shareholder structure. While these sponsors can provide valuable funding and expertise, they may also push for aggressive growth strategies that could strain financial risk.

As smaller ISPs face challenges in maintaining service quality and profitability, larger companies are likely to seize acquisition opportunities, further reshaping the competitive landscape.

Table 1

Financial sponsors
Company Main Shareholder
Desktop HIG Capital
Giga Mais Fibra EB Capital
Triple Play (Alares) Grain Management
Vero Vinci Partners, Warburg Pincus

Emerging Challenges And Opportunities

Despite a positive outlook for the fixed broadband segment within the telecommunications industry, we expect ISPs to face several challenges, including high interest rates and inflation, which may strain demand and operational margins. The competitive landscape remains dynamic, with smaller players employing aggressive pricing strategies.

However, established ISPs can leverage their strengths in service quality and customer satisfaction to navigate these challenges. Additionally, the emergence of neutral network models presents both opportunities and uncertainties, requiring ISPs to adapt their strategies accordingly.

Navigating A Complex Landscape

As Brazilian ISPs navigate a rapidly evolving market, their credit quality will be increasingly tested by macroeconomic challenges and competitive dynamics. Companies with weaker capital structures may struggle to maintain liquidity and meet debt obligations, while the anticipated slowdown in capital expenditures may hinder revenue growth in the short term.

Those that prioritize financial stability, operational efficiency, and customer satisfaction will be better equipped to sustain their creditworthiness in this complex landscape. The future of Brazilian ISPs hinges on their ability to balance prudent financial management with strategic investments to remain competitive.

Related Research

Algar Telecom S/A

Brasil Tecnologia E Participacoes S.A.

Brisanet Participacoes S.A.

Desktop S.A.

Giga Mais Fibra Telecomunicacoes S.A.

Ligga Telecomunicacoes S.A.

Triple Play Brasil Participacoes S.A.

Unifique Telecomunicacoes S.A.

Vero S.A.

This report does not constitute a rating action.

Primary Credit Analyst:Henrique Koch, Sao Paulo +55 1138184113;
h.koch@spglobal.com
Secondary Contacts:Fabio Rebelo, Sao Paulo + 551138184144;
fabio.rebelo@spglobal.com
Wendell Sacramoni, CFA, Sao Paulo + 55 11 3039 4855;
wendell.sacramoni@spglobal.com

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