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18 Oct 2005
MOODY'S ASSIGNS B1 RATING TO TIME WARNER TELECOM HOLDINGS' PROPOSED SENIOR SECURED TERM LOAN B; DOWNGRADES OTHER DEBT ISSUES; AFFIRMS B2 CORPORATE FAMILY RATING; OUTLOOK CHANGED TO STABLE
Approximately $1.35 billion in debt affected
New York, October 18, 2005 -- Moody's Investors Service has assigned a B1 rating for the proposed $200
million 5-year senior secured Term Loan B at Time Warner Telecom
Holdings Inc. ("TWTH" or the "borrower"), a wholly
owned subsidiary of Time Warner Telecom Inc. (the "parent",
the "company" or "TWT"). The proposed Term Loan effectively
will be used to refinance the 9.75% TWT notes due 2008,
extending the company's upcoming debt amortization schedule and
lowering the company's borrowing cost. Moody's has
also downgraded the $240 million Floating Rate Notes at TWTH to
B2 from B1 to reflect the increased risk of their second priority lien
vis-a-vis the addition of $200 million of
first priority debt (i.e. the proposed Term Loan B) at TWTH.
Similarly, Moody's has downgraded the $400 million
10.125% senior notes at TWT to Caa1 from B3 to reflect their
increased structural subordination to the higher debt level at TWTH.
The outlook has been changed from negative to stable.
Moody's has assigned the following rating:
At Time Warner Telecom Holdings Inc.:
$200 Million Sr. Secured Term Loan B -- B1
Moody's has affirmed the following ratings:
At Time Warner Telecom, Inc.:
Corporate family rating -- B2
Speculative grade liquidity rating -- SGL-1
At Time Warner Telecom Holdings Inc.:
$150 Million (to be reduced to $110 Million concurrent with
the closing of the proposed Term B Loan) First Priority Senior Secured
Revolver -- B1
Moody's has downgraded the following ratings:
At Time Warner Telecom, Inc.:
$200 Million 9.75% Sr. Notes due 2008 --
to Caa1 from B3
$400 Million 10.125% Sr. Notes due 2011 --
to Caa1 from B3
At Time Warner Telecom Holdings Inc.:
$240 Million Second Priority Senior Secured Floating Rate Notes
due 2011 -- to B2 from B1
$400 Million 9.25% Senior Notes due 2014 --
to B3 from B2.
The rating outlook has been changed to stable from negative.
TWT's B2 corporate family rating reflects Moody's concerns about fundamental
challenges confronting the competive local exchange carrier ("CLEC")
industry. In order to grow, TWT must take and maintain market
share from significantly larger and better-capitalized regional
Bell operating companies ("RBOCs") in order to earn a positive
return on its network investment. The B2 corporate family rating
reflects continuing top line pressure due to competitive pricing dynamics,
high leverage, capex and cash interest burden and TWT's inability,
to date, to generate positive free cash flow.
In order to support its significant debt and high cash interest burden,
Moody's believes TWT must achieve and sustain fairly high top-line
growth, while taking RBOC market share. The company's high
leverage and its inability, to date, to generate free cash
flow also constrains its strategic options in a challenging market,
and thus suppresses the ratings. TWT's good liquidity position,
healthy and improving EBITDA margins, and growth in its enterprise
customer business support the ratings. Moody's also recognizes
TWT's success in stabilizing its core revenue, as the growth in
its enterprise segment has offset declines in the carrier and ISP market
as well as reductions in intercarrier compensation due to regulatory changes.
The rating also incorporates TWT's reduced exposure to changes in intercarrier
compensation, as well as its advantageous cost structure and operational
efficiency which result from the scalability of its Ethernet platform.
Moody's recognizes that the absence of TWT's free cash flow generation
has been delayed by its current business plan, which requires significant
capital investment. Consequently, Moody's does not expect
TWT to generate positive free cash flow until at least 2008, given
its interest burden and investment needs, which have averaged at
the high end of the industry, with capital expenditures expected
to surpass 20% of revenue for at least the intermediate term.
Moody's believes that, over the intermediate term, an increased
emphasis by RBOCs and other CLECs on offering products similar to that
of TWT may erode TWT's competitive advantage, which is currently
driven by product differentiation. If TWT fails to defend its customer
base, all else held equal, lower long term business-growth
prospects may lead to lower ratings at the company. Moody's rating
also assumes that further anticipated declines in carrier demand,
due to industry consolidation, will only modestly affect TWT's
earnings. Should TWT fail to maintain revenue growth or adequately
maintain its EBITDA margins over the intermediate term in the face of
increasing competition, the ratings could fall. Specifically,
sustained EBITDA margins of below 30% or total debt to EBITDA of
higher than 5.5x would likely lead to downward ratings pressure.
If TWT is able to consistently demonstrate reduced earnings volatility
resulting from improved revenue diversification, coupled with meaningful
EBITDA margin increases, the outlook may improve. Furthermore,
if TWT can achieve sustained business growth that results in several consecutive
quarters of free cash flow, the ratings could rise. Specifically,
sustained EBITDA margins in excess of 35% coupled with reduced
investment levels that allow for a free cash flow to debt metric in excess
of 5% would likely lead to higher ratings.
The ratings also incorporate the company's strong liquidity, which
should allow it to weather several years of modest cash burn. Moody's
believes that TWT's significant cash and marketable security holdings
($382 million as of Q2'05) as well as the undrawn $150
million revolving credit facility, which will reduce to $110
million as part of the changes to the company's capital structure,
provides sufficient cushion to meet near term operating and investing
needs. Moody's also notes that the proposed transaction strengthens
TWT's debt maturity profile and thus supports its liquidity as well as
its long term ratings. Moody's also recognizes that the current
high level of competition in the telecommunications industry necessitates
TWT to continue investing in its physical plant to support its on-going
strategic initiatives and revenue growth; however, TWT's SGL-1
speculative grade liquidity rating may come under pressure in the intermediate
term if the company's cash burn rate accelerates while the company continues
to build out its infrastructure.
The change from negative to stable in TWT's outlook reflects the company's
ability, to date, to meet the operating challenges posed by
its competitive environment by specifically replacing its declining carrier
revenue base through its successful penetration into the enterprise market
and its ability to grow EBITDA margins from that customer base.
Moody's also believes that the company's debt capitalization
will remain consistent with the proposed structure over the intermediate
Moody's has lowered the rating of the second lien senior secured floating
rate notes at TWTH to B2 from B1 due to the additional $160 million
($200 million Term Loan B less a reduction in the size of the existing
revolver from $150 million to $110 million) of potential
first lien debt, which ranks ahead of the second priority floating
rate notes thereby diluting the claim that the latter's holders
would have on the company's assets in a distress situation.
Moody's has also lowered the ratings of the senior unsecured debt
at TWT to Caa1 from B3 due to the increased structural subordination resulting
from the aforementioned refinancing, which results in the transfer
$200 million of debt from TWT to TWTH.
Time Warner Telecom Inc., headquartered in Littleton,
Colorado, provides data, dedicated Internet access,
and local and long distance voice services to business customers in 44
metropolitan markets in the United States.
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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