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01 Dec 2005
MOODY'S ASSIGNS Caa1 RATING TO PROPOSED $150MM SENIOR SECURED FRNS OF CLEVELAND UNLIMITED, INC. RATING OUTLOOK STABLE.
First Time Rating / $150 million of Debt Facilities Affected.
New York, December 01, 2005 -- Moody's Investors Service today assigned a Caa1 rating to the proposed
$150 million senior secured floating rate notes due 2010 to be
issued by Cleveland Unlimited, Inc. and a Caa1 corporate
family rating, with stable rating outlook. The ratings reflect
the very early stage of the company's business and its small scale,
the high leverage of the company, execution risk as the company
launches new markets, and Moody's opinion that there is insufficient
asset coverage to avoid impairment in the event of default.
The assigned ratings are:
Corporate family Caa1
$150 million senior secured floating rate notes due 2012 Caa1
Speculative grade liquidity SGL-3
Cleveland Unlimited is currently a wireless service provider in the Cleveland-Akron,
Ohio market utilizing an all-you-can-call,
unlimited local, limited roaming offering. This business
plan is similar to Leap Wireless (B1 corporate family rating) and MetroPCS
(unrated) which targets underserved, less penetrated market segments
of people aged 18 to 34 and other credit challenged demographics.
The simple service offering of a no contract, flat rate service
has proven attractive by those larger operators (Leap & MetroPCS)
who position themselves as a value player in their markets with a low
cost structure due to their simple service offering. This target
market, however, is credit challenged and churn rates are
higher than industry average, with Leap Wireless around 4%
and Cleveland Unlimited's over 7% in 3Q05.
Cleveland Unlimited acquired its current operations in July 2004 from
a subsidiary of Cablevision Systems Corporation who had been offering
similar unlimited local plans. On June 20, 2005, the
company launched its new "Revol" brand and further simplified its offering
from seven rate plans to one. At September 30, 2005,
Cleveland Unlimited served approximately 101,500 subscribers.
From this base of 3 million potential customers (POPs) in Cleveland-Akron,
the company is now looking to expand its footprint into nearby markets
to reach total POPs of over 8 million, using proceed of this offering.
The first new market will be acquired from Leap Wireless in Toledo-Sandusky,
Ohio (1 million POPs). Leap has approximately 30,700 subscribers
there and Cleveland Unlimited hopes to re-brand this market in
1Q06. Utilizing spectrum purchased in the FCC's Auction 58,
Cleveland Unlimited will build-out new markets in Indianapolis,
IN (1.6 million POPs), Columbus, OH (1.7 million
POPs) and Canton-Youngstown, OH (1 million POPs) with service
launch expected in 2Q06.
All this rebranding and new market construction will consume cash in the
near term and depress EBITDA. Moody's does not forecast free cash
flow generation until 2007, and does not expect debt to EBITDA to
fall below 10 times until at least 4Q06. The high default probability
these weak credit protection measures imply constrain the ratings.
While the proposed notes are secured, Moody's does not believe there
is sufficient collateral coverage to ensure that Cleveland United's creditors
are repaid in full in the event of default. The company's primary
asset its spectrum holdings, and relying on Auction 58 data for
markets of similar size, Moody's estimates the company's spectrum
to be worth between $100 and $120 million. While
the acquisition of subscribers will increase the value of the firm,
in Moody's opinion until the monthly churn rate of the company's subscribers
drops significantly, additional subscriber value is quite uncertain,
and is thus still likely to yield a value insufficient to cover the notes.
Notwithstanding the likely impairment in the event of default, Moody's
recognizes that there are logical buyers for the company's assets (Leap
and MetroPCS, in particular) which should improve creditor recoveries
compared to a straight liquidation scenario.
The ratings could face upward pressure should the "Revol" brand continue
its recent success in growing its subscriber base Cleveland and then in
its new markets, and the company begins to generate sustainable
amounts of free cash flow. The ratings could be downgraded should
churn remain elevated, new market launches prove disappointing,
and the prospect of free cash flow generation recedes.
Moody's also assigned a speculative grade liquidity rating of SGL-3
denoting the company's adequate liquidity, in Moody's opinion.
The liquidity rating is constrained by the lack of free cash flow generation
in the near term, and the absence of any backup liquidity facility.
Positively, Cleveland Unlimited will have adequate liquidity in
the form of excess proceeds from proposed FRNs, and the lack of
any maintenance financial covenants that could constrain the use of this
Based Independence, Ohio, Cleveland Unlimited, Inc.
is a provider of wireless telecommunications service in the Cleveland-Akron,
Ohio market with approximately 101,500 subscribers at September
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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