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Rating Action:

MOODY'S ASSIGNS B3 RATING TO NEW SENIOR SECURED CREDIT FACILITIES OF VIRGIN MOBILE USA, LLC WITH A POSITIVE RATING OUTLOOK.

27 May 2005
MOODY'S ASSIGNS B3 RATING TO NEW SENIOR SECURED CREDIT FACILITIES OF VIRGIN MOBILE USA, LLC WITH A POSITIVE RATING OUTLOOK.

First Time Rating / $600 Million of Credit Facilities Affected.

New York, May 27, 2005 -- Moody's Investors Service today assigned a B3 rating to the proposed senior secured credit facilities of Virgin Mobile USA, LLC as described below. Moody's also assigned a B3 senior implied rating for the company, and the outlook for all these ratings is positive.

The assigned ratings are:

Senior implied -- B3

$100 million senior secured revolving credit facility expiring 2010 -- B3

$500 million senior secured term loan maturing 2012 -- B3

The B3 senior implied rating reflects the challenging operating environment the company faces as US wireless growth slows and carriers seek to increase their penetration of Virgin Mobile USA's target markets, the inherent challenges of profitably providing prepaid wireless service in the US, as well as the company's high leverage and current lack of free cash flow. The rating is also constrained by Moody's opinion of the lack of asset protection available to lenders in a distress scenario, as Virgin Mobile USA is a 'virtual' network operator, without spectrum or wireless network assets. Positively, the rating reflects the strength of the company's relationships and material contracts with its sponsors, Sprint Corporation (Baa3 developing) and the Virgin Group (unrated), the good market opportunity for the company's unique brand of wireless service, its recent success in the marketplace and prospects for continued strong subscriber growth. The $600 million of senior secured credit facilities are also rated B3 as these obligations will be the only long-term debt of the company.

The positive ratings outlook reflects Moody's opinion that the ratings could be upgraded within the next 12 to 18 months should Virgin Mobile USA be able to increase ARPUs by roughly $3/month from current levels while growing its subscriber base above 25% per year, and to achieve sustainable free cash flow. Moody's believes the company will have sufficient liquidity to absorb negative cash flows in the short term as it continues to rapidly expand its subscriber base. The ratings outlook is likely to stabilize if the company cannot increase ARPU and should subscriber growth slow closer to the industry average. The ratings are likely to be lowered should the company not be able to generate material free cash flow, or should violation of any of its bank covenants appear likely.

Since launching service in 2002, Virgin Mobile USA has been quite successful in attracting subscribers to its prepaid wireless service, attaining roughly 3 million subscribers in 3 years. As the US wireless industry matures and the market penetration of good credit quality, high usage subscribers nears saturation, the under-penetrated subscriber growth opportunity lies in lower credit quality subscribers, or those who as yet have been reluctant to commit to an annual contract for wireless service. Virgin Mobile USA's addresses this significant market opportunity with a simple prepaid service offering utilizing a strong brand with a clear focus on the youth market, clever marketing, and demographically tailored content.

Moody's believes that if the US wireless industry is to achieve higher penetration levels, those incremental subscribers are unlikely to pay $50 per month and sign a one-year contract. Therefore, distinct market segments must be targeted with lower price points on less burdensome terms, as Virgin Mobile USA has been doing for the past three years. However, the large, well established carriers are addressing this market opportunity on two fronts: their own prepaid offerings, and low priced add-a-line, family plans with free in network calling. In addition, recognizing the large market opportunity many other virtual network operators have either recently launched or will soon. These competitive forces are likely to hamper Virgin Mobile USA's prospects and make improving ARPU and continued rapid subscriber growth quite challenging.

As a testament to its strong brand and good customer service, Virgin Mobile USA's monthly subscriber churn has been lower than could be expected of a 100% prepaid service provider. Nonetheless, churn may creep higher as some its subscribers outgrow the limitation of this relatively high-priced (on a per minute basis) wireless service should they wish to use their mobile phones at levels closer to current industry averages. While the company has plans to address this higher usage end of their target market, Moody's is concerned about the ability of Virgin Mobile USA to retain those higher MOU subscribers who may be better served with a postpaid contract offering from another carrier. As noted above, a key factor to improve the ratings will be the company's ability to increase ARPU by addressing this higher spending part of its target market.

Due to its rapid growth and still nascent stage of its operations, Virgin Mobile USA is consuming cash and is not expected to generate free cash flow until 2006. Proceeds from the proposed senior bank financing will not be used to fund future growth but will instead be returned to shareholders, effectively returning all the capital they have provided, and to repay existing debt. Despite the company being effectively 100% debt financed (pro forma for the proposed financing), and the lack of hard assets or licensed spectrum to provide lenders downside protection, Moody's takes comfort in the material contracts between Virgin Mobile USA and its two sponsors, which contracts will be pledged to the lenders. These 20 year contracts provide for use of the Virgin brand for a nominal royalty, and access to the Sprint PCS network at rates that allow Virgin Mobile USA to earn a good yield per minute.

Headquartered in Warren, NJ, Virgin Mobile USA is a provider of wireless services targeting the youth market with over 3 million subscribers at the end of March 2005.

New York
Julia Turner
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Marcus Jones
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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