Fitch Ratings has downgraded Atento Luxco 1 S.A.'s (Atento) Long-Term Foreign Currency Issuer Default Rating (IDR) to 'CC' from 'CCC'.

In addition, Fitch has downgraded Atento's USD500 million senior secured notes due 2026 to 'CC'/'RR4' from ' CCC' /'RR4' and Atento Brasil S.A.'s long-term National Scale Rating to 'CC (bra)' from 'CCC(bra)'.

The downgrades reflect Atento's elevated credit risk due to increased debt and expectations of sustained cash flow burn resulting from large payments on derivative positions tied to Brazil's CDI rate and financial obligations. Absent tangible steps to bolster its capital structure, Fitch expects the company will remain highly levered and need to restructure its debt.

Key Rating Drivers

Default Appears Probable: Atento's high financial obligations on derivatives and capital markets debt relative to its EBITDA generation will likely lead to a default or a default-like process absent a shareholder injection of equity. Net leverage is forecast at above 6x in 2023 and should weaken as FCF is projected to remain negative through 2025.

Additional Debt After Missed Payment: Atento recently issued USD40 million of receivable-secured notes to settle a missed payment on derivative obligations. Following the payment, it remedied an interest coupon payment on its 2026 notes while in the grace period. These new two-year notes pay a cash coupon of 10% and have a pay-in-kind component of 10%.

Pressured Cash Flow: Fitch expects Atento to generate negative FCF of approximately USD60 million in 2023 and USD40 million in 2024 as the company will struggle to generate operating EBITDA above USD95 million. FCF 2023 estimates contemplate total cash interest obligations including derivative payments of close to USD100 million and capex around USD50 million. Interest rates in Brazil, under Fitch's forecast, are expected to remain above 13% for much of 2023 and to decline progressively in 2024.

Industry Overcapacity: Work from home policies are expected to continue to result in intense competition in Atento's customer relationship management (CRM) and business process outsourcing (BPO)industry. More employees working from home has resulted in cost savings for operators but also in workstation overcapacity, which has led to increased price competition as companies fight to fill available capacity. Spare capacity is estimated at 20%-25%, and Brazilian and Spanish markets in particular are seeing fierce competition.

Derivation Summary

Atento is the largest CRM/BPO provider in Latin America, with around 15% market share. Its ratings are tempered by its disproportionate leverage, pressured cash flow and weak liquidity as well as by competitive industry dynamics.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Revenues grow low-single digits;

Fitch-defined EBITDA margins of 7%;

Capex in the range of around USD40 million to USD50 million;

Interest rates above 13% in 2023 and progressively decline in 2024;

Brazilian real exchange rate at BRL5.25/USD1.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Extraordinary measures by shareholders to recapitalize the company;

Reduction of risks related to its derivative position;

Neutral FCF generation.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

The entrance into a grace or cure period following non-payment of a material financial obligation or the announcement of a distressed debt exchange would lead to a downgrade to 'C';

A filing for bankruptcy protection would lead to a downgrade to 'D'.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Weak Liquidity: Atento's liquidity is weak. The company entered a cure period when it missed a coupon payment due on February 10, 2023 of its 2026 notes. The payment was cured on Feb. 22, 2023 after Atento received USD34 million of net proceeds from the issuance of approximately USD40 million of secured notes due 2025. Fitch expects the company to face negative FCF in the range USD60million in 2023 and around USD40 million in 2024.

Issuer Profile

Atento Luxco 1 (Atento Luxco) is fully controlled by Atento S.A. (Atento), which is the largest provider of customer relationship management (CRM) and business process outsourcing (BPO) services in Latin America.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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