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15 Sep 2010
B1 CFR, B2 PDR Affirmed; Rating Outlook Stable
New York, September 15, 2010 -- Moody's Investors Service assigned B1 ratings to Knology,
Inc.'s (Knology or the company) $770 million of proposed
First Lien Senior Secured Bank Credit Facilities and affirmed the company's
existing B1 Corporate Family Rating (CFR) and B2 Probability of Default
Rating (PDR). The new credit facilities will refinance Knology's
$639 million of existing credit facilities (under which approximately
$577 million is expected to be outstanding at closing, and
the ratings for which will be withdrawn upon successful completion of
the refinancing and corresponding debt repayment) and augment excess cash
balances of approximately $52 million to fund the announced $165
million acquisition of Sunflower Broadband later this year. The
Speculative Grade Liquidity Rating remains SGL2, indicating "good"
proforma liquidity, and the rating outlook remains stable.
The following summarizes Moody's ratings and today's rating actions for
Corporate Family Rating -- affirmed B1
Probability of Default Rating -- affirmed B2
Speculative Grade Liquidity Rating -- SGL-2
$570 million Gtd. Sr. Sec. Term Loan B due
2016 - assigned B1 (LGD-3, 34%)
$150 million Gtd. Sr. Sec. Term Loan A due
2015 - assigned B1 (LGD-3, 34%)
$50 million Gtd. Sr. Sec. Revolving Credit
Facility due 2015 -- assigned B1 (LGD-3, 34%)
$614 million Gtd. Sr. Sec. Term Loan due 6/30/12
-- B1 (LGD-3, 33%)*
$25 million Gtd. Sr. Sec. Revolving Credit
Facility due 6/30/12 -- B1 (LGD-3, 33%)*
* to be withdrawn upon successful completion of the proposed refinancing
and corresponding debt repayment
Knology's B1 CFR continues to broadly reflect the company's comparatively
small size and the underlying business risks inherent to its "overbuilder"
operating model, including intensifying competition from larger
and better capitalized cable and direct broadcast satellite (DBS) companies
and telecom operators. Ratings are also constrained by the company's
moderately high financial leverage and acquisitive growth strategy,
notwithstanding generally successful historical integration and partial
cash funding of the latter. Over time we expect these risks may
be somewhat better mitigated by ongoing growth of the company's customer
base, whether through additional acquisitions or further penetration
of the existing subscriber base via market share gains. Knology's
ratings are supported by its attractive footprints in secondary and tertiary
markets and the company's history of meeting planned targets, including
improved free cash flow generation, EBITDA growth and absolute debt
reduction. Key credit metrics have strengthened over the past couple
of years, with debt-to-EBITDA declining to 4.2x
and free cash flow-to-debt approximating 8% at 6/30/2010
(incorporating Moody's standard adjustments) from 4.7x and
6%, respectively, at the beginning of 2009.
Ratings also continue to reflect Knology's deemed good liquidity profile,
which is supported by access to external sources of funds and the company's
improved cash generating capabilities.
On August 4, 2010, Knology announced a definitive agreement
to acquire the assets of Sunflower Broadband, an incumbent cable
multiple system operator serving residential and business customers in
Kansas (approximately 54 thousand homes passed and 105 thousand RGUs)
for $165 million. The transaction is expected to close early
in the fourth quarter and will be funded with a combination of existing
balance sheet cash and a portion of the aforementioned new bank credit
As indicated on August 5, 2010, we continue to believe that
the proposed acquisition is consistent with the company's historical track
record of growth through acquisition (albeit into new markets via an incumbent
service provider), and while the purchase price multiple (estimated
by company management to be approximately 7.5x the $22 million
of reported EBITDA) appears somewhat high (particularly relative to now
lower market multiples), the consolidated proforma leverage and
free cash flow profile are not expected to be materially impacted (note
that leverage is expected to approximate 4.4x on a proforma basis,
and trend lower to an adjusted 4.3x as projected synergies are
realized). "Upon review of the proposed refinancing and pending
acquisition we have determined this trasaction to have limited impact
on the company's capital structure and believe that Knology's
credit profile remains consistent with a B1 CFR and a B2 PDR," noted
Russell Solomon, Moody's Senior Vice President and lead analyst
for the company.
The principal methodologies used in rating Knology, Inc.
were Global Cable Television Industry published in July 2009 and Loss
Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
The rating outlook is stable, reflecting Moody's view that Knology
will continue to demonstrate steady operating performance and maintain
financial metrics commensurate with its rating category. The stable
outlook also assumes that Knology's management team will adhere
to prudent fiscal policies, including conservatively financed acquisition
What Could Change the Rating - Up
Moody's believes that consistent revenue and subscriber growth,
coupled with maintaining or improving EBITDA margins, free cash
flow production and good liquidity, and continued improvement in
financial leverage trending toward and remaining below 3.25x on
a sustained basis could warrant consideration of a positive rating outlook
and/or a prospective upgrade of the CFR to Ba3.
What Could Change the Rating - Down
Conversely, deterioration in operations, including unexpected
subscriber losses, liquidity erosion and/or an increase in financial
leverage that would be sustained above 4.5x, such as to support
a debt-financed acquisition, could pressure ratings down
or cause Moody's to change the outlook to negative.
Knology, Inc. is a provider of video, high speed data
and voice services to approximately 232 thousand video subscribers.
These subscribers are primarily located in the Southeast and the upper
Midwest regions of the country. Knology's business model is that
of an "overbuilder" in which the company builds or acquires networks in
regions overlapping that of larger incumbent cable operators, such
as Mediacom (rated B1) and Comcast (rated Baa1), and attempts to
differentiate itself with high quality product offerings and efficient
but localized customer service. Knology generated revenue of apporoximately
$436 million for the twelve month period ended June 30, 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's information,
confidential and proprietary Moody's Analytics' information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
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Please see the ratings disclosure page on our website www.moodys.com
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Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Assigns B1 Ratings to Knology's Proposed New Sr. Secured Bank Credit Facilities
250 Greenwich Street
New York, NY 10007
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