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07 Jan 2005
MOODY'S AFFIRMS CONSOLIDATED COMMUNICATIONS' B1 SENIOR IMPLIED RATING AND ASSIGNS A B1 RATING TO SECURED BANK TERM LOAN; CHANGES OUTLOOK FROM NEGATIVE TO STABLE
New York, January 07, 2005 -- Moody's Investors Service has assigned a B1 rating to Consolidated
Communications Acquisition Texas, Inc.'s ("CCAT")
and Consolidated Communications Inc.'s ("CCI") $390
million senior secured term loan. At the same time, Moody's
is affirming the B1 rating on CCAT's and CCI's existing senior secured
term loans and revolving credit facility as well as Consolidated Communications
Texas Holdings, Inc.'s ("CCTH") B1 senior implied rating
and SGL--2 liquidity rating and the B3 rating on CCTH's and Consolidated
Communications Illinois Holdings, Inc.'s ("CCIH") senior
unsecured notes. Moody's intends to withdraw the ratings
on CCAT's and CCI's existing term loans once their $390 million
credit facility and initial public offering ("IPO") are consummated.
At that time, CCTH and Homebase Acquisition LLC will merge into
CCIH and be renamed Consolidated Communications Holdings Inc. (the
"company" or "Consolidated" or "CCH").
Moody's has assigned the following rating:
CCAT and CCI
$390 million Senior Secured Term Loan due 2011 -- B1
Moody's has affirmed the following ratings:
CCAT and CCI
$30 Million Revolving Senior Secured Credit Facility due 2010 --
$122 Million Senior Secured Term Loan A due 2011 -- B1
$314 Million Senior Secured Term Loan C due 2011 -- B1
Senior Implied Rating -- B1
Senior Unsecured Issuer rating -- B3
Liquidity rating -- SGL-2
CCTH and CCIH
$200 Million 9.75% Senior Unsecured Notes due 2014
Moody's has changed the outlook on all ratings from negative to stable.
The ratings reflect Consolidated's high leverage (roughly 4x total
debt to TTM adjusted EBITDA as of Q3'04 on a pro forma basis),
vulnerability to heightened wireless or cable telephony competition in
its rural markets, and its relatively flat top-line growth
prospects and limited post-dividend free cash flow. Stable
and dependable operating cash flow, a favorable regulatory environment,
barriers to competitive entry, and a shift in the company's
capital structure, subsequent to the planned IPO, to one with
a higher equity weighting, support the ratings.
The change in outlook from negative to stable outlook reflects the company's
success in navigating the challenges inherent to its April 2004 acquisition
of TXU Communications, which increased the company's access
lines by roughly 190%. Consolidated has reduced headcount
at its Texas operations by 70 employees and is within cost targets for
implementation of its integration strategy.
If Consolidated were to meet or exceed our expectations with respect to
free cash flow generation, and it begins to deleverage materially,
the outlook and ratings could improve over time. However,
the common dividend payment, subsequent to the IPO, will consume
much of the free cash flow available for debt reduction. Consequently,
Moody's does not anticipate significant debt reduction going forward
unless margins improve to at least 45% so long as anticipated dividends,
concurrently, remain unchanged. If EBITDA margins were to
fall below 40% for a protracted period, the company's
ratings would likely decline.
In early December 2004, the company announced an IPO of up to $400
million of its common equity ($81.5 million in net proceeds
from the offering after deducting offering-related expenses).
Concurrent with the IPO, the company expects to amend and restate
its credit facilities by increasing the amount of term loans from $314
million to $390 million. Proceeds from the $390 million
term loan and a portion of the proceeds from the IPO will be used to pay
down the existing $119 million Term A loan, refinance the
Term C loan and $70 million of the 9.75% senior unsecured
notes (leaving $130 million of senior notes outstanding).
Upon completion of the IPO, the company's organizational structure
will have been simplified. Subsequent to the IPO, Homebase
Acquisition, CCTH and CCIH will have consolidated into one entity,
CCH. CCH will succeed and assume the obligations of CCTH and CCIH
under the indenture. Homebase, the parent prior to the contemplated
transaction, guarantees the several obligations of CCTH, CCIH,
CCAT and CCI on a limited basis. The company expects that the bank
lenders will release CCH, as successor to Homebase Acquisition,
from the downstream limited recourse guarantee.
Moody's expects that CCH and each of the borrowers' (i.e.
CCAT and CCI) subsidiaries, with the exception of Illinois Consolidated
Telephone Co. ("ICTC"), will jointly and severally,
fully and unconditionally guarantee the bank credit facilities.
We note that Illinois Consolidated Telephone Co. comprises over
20% of the company's consolidated revenue, EBITDA,
and nearly 30% of its net plant. The credit facilities are
secured by a perfected lien and pledge of all capital stock and inter-company
notes of CCH (and each of its direct and indirect subs, including
a pledge of stock of ICTC) and a perfected lien and security interest
in all assets. These facilities are not notched relative to the
senior implied rating since they comprises the preponderance of the company's
debt. The 9.75% senior unsecured notes are rated
two notches below the B1 senior implied rating since these notes lack
security and do not benefit from upstream guarantees, and are effectively
subordinated to all of the company's subsidiaries' payables.
Consolidated's SGL-2 rating reflects Moody's view that the
company possesses good liquidity and has an ability to meet its estimated
obligations over the next twelve months through internal resources.
Subsequent to the IPO, and accounting for an anticipated $48
million annual common dividend payment, Moody's expects the
company to generate roughly $10-15 million annually in free
cash flow. Moody's understands that the amended credit agreement
will contain provisions that restrict the company's ability to pay
dividends should EBITDA generation falter, and will mandate compliance
with a total net leverage test (TBD). As of 9/30/04, the
company could have paid out upwards of $63 million under the amended
and restated credit agreement. Consolidated's total net leverage
(as defined in the credit agreement) was 3.9x for the TTM ending
9/30/04 pro forma for the transaction.
Moody's believes that stable and predictable cash flows, which
characterize most rural telephone properties, result in a relatively
low risk business model. Historically, Consolidated's
properties have experienced little competition due to market demographics
and a favorable regulatory regime in Texas. Low customer density
(as low as 66 people per square mile in five counties in Illinois served
by Consolidated) and the high residential component (roughly 66%
of the company's access lines) to the company's operations
provide an effective barrier to entry as it is not economically feasible
for a competitor to build out a new network in their Texas and Illinois
service territories. Consolidated's RLEC status also exempts
it from interconnection requirements that would otherwise allow competitors
to use the company's access lines.
Moody's expects only nominal revenue growth and EBITDA margin improvement,
primarily at the Texas operations, over the next several years.
Free cash flow generation will depend largely on careful operating expense
and capital investment management, little net revenue impact from
any changes to Federal and Texas USF subsidies, and effective hedging
of floating rate interest rate exposure. Federal and state subsidies
currently exceed 15% of total revenues -- with higher reliance
on subsidies being a credit negative from Moody's perspective.
Subsequent to the amendment and restatement of the credit facility and
the anticipated purchase of $70 million of the 9.75%
senior notes, roughly 75% of the company's debt will
be floating rate. Moody's assumes that at least half the
floating rate debt (i.e. the senior secured bank debt) will
be hedged to a fixed rate as is currently the case.
The company has employed a disciplined investment strategy in maintaining
and steadily upgrading its network. We expect the company to continue
spending at roughly the industry norm of 10-13% of revenues
on capital investment. In addition, we expect the company
to remain in compliance with its bank covenants, affording it full
access to the $30 million undrawn revolver. Subsequent to
the amendment and restatement of the credit facility, Consolidated's
assets will remain largely encumbered and therefore provide little if
any additional alternative funding flexibility. Moody's assessment
of present trading levels for RLEC assets indicates that debt holders
benefit from adequate asset protection metrics, particularly holders
of the senior secured bank debt.
Consolidated Communications is a rural local exchange carrier headquartered
in Mattoon, Illinois.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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