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Rating Action:

Moody's Assigns B3 Rating to Cequel Communications' Add-On; Bank Debt Upgraded to Ba2

13 Jan 2011

All Other Ratings Affirmed; Outlook Stable

New York, January 13, 2011 -- Moody's Investors Service assigned a B3 (LGD5-80%) rating to Cequel Communications Holdings I, LLC's (Cequel or the company) $625 million (face amount) planned add-on to its existing B3-rated 8.625% Senior Notes due 2017. The company's B1 Corporate Family Rating (CFR), B1 Probability of Default Rating (PDR) and the B3 (LGD5-80%) ratings on its existing $1.2 billion of Senior Notes (due 11/15/17) were all affirmed. The former Ba3 ratings for subsidiary Cequel Communications, LLC's (Cequel LLC) existing $2.5 billion of combined 1st lien Senior Secured Bank Credit Facilities (consisting of a $2.3 billion Term Loan and a $200 million Revolver) were upgraded to Ba2 (LGD2-24%) due to the incremental debt cushion afforded by the new structurally and effectively subordinated debt, and their correspondingly much larger share of the company's consolidated capitalization going forward, on a basis consistent with application of Moody's Loss Given Default (LGD) Methodology. Moody's also assigned an SGL-3 Speculative Grade Liquidity Rating, indicating our expectation of an "adequate" liquidity profile for the company over the next twelve months. The Senior Notes are unsecured obligations of a holding company and, in the absence of upstream subsidiary guarantees, are both effectively and structurally subordinated to a significant amount of operating company liabilities, including the aforementioned rated bank debt and all non-debt liabilities of structurally senior legal entities. Proceeds from the new offering will augment existing cash balances to fund the pending $350 million acquisition of NPG Cable, Inc. (NPG) and to repay capital to holders of preferred and common stock ($125 million and $367 million, respectively) in the company's parent. The rating outlook remains stable.

The following summary lists Moody's current ratings and today's actions for Cequel and its subsidiaries:

Issuer: Cequel Communications Holdings I, LLC

...Corporate Family Rating, affirmed B1

...Probability of Default Rating, affirmed B1

...Speculative Grade Liquidity Rating, assigned SGL-3

...Rating Outlook, Stable

...$625 Million (face amount, to be issued at a premium) Add-On to 8.625% Sr Unsec Nts due 2017, assigned B3 (LGD5-80%)

...$1.2 Billion of Existing 8.625% Sr Unsec Nts due 2017, affirmed B3 (to LGD5-80% from LGD5-85%)

Issuer: Cequel Communications, LLC

...Existing $2.3 Billion 1st Lien Sr Sec Term Loan due 11/5/13, upgraded to Ba2 (LGD2-24%) from Ba3 (LGD3-31%)

...Existing $200 Million 1st Lien Sr Sec Revolver due 5/5/13, upgraded to Ba2 (LGD2-24%) from Ba3 (LGD3-31%)

RATING RATIONALE

Cequel's B1 Corporate Family Rating (CFR) broadly reflects the company's high financial risk, as exacerbated by its financial sponsor ownership, and growing business risk. These risks are evidenced by the company's high proforma adjusted debt-to-EBITDA leverage of approximately 6x (including Moody's standard adjustments and reported incremental NPG EBITDA) and a weak free cash flow profile, both of which will continue to constrain ratings. The current transaction, which includes sizeable pay-downs of equity ownership in the form of both preferred and common shares, highlights the risk associated with the company's financial sponsor ownership structure, and the increased likelihood of fiscally aggressive policies associated therewith serves to somewhat constrain ratings, as well. Moreover, we expect the competitive environment in Cequel's markets to intensify further in future periods, particularly in comparison to the relatively benign situation to date which has seen principally DBS-only competition. Moody's also remains watchful of potential disruption of the current pay-TV business model stemming from evolving technological advances and/or changing consumer behavior over the extended rating horizon, particularly if core video programming becomes more readily available through an increasing array of alternative outlets, a risk applicable to the broader industry sector participant pool at large.

Still, the relative stability of the cable TV business model as currently enjoyed and the as yet comparatively modest competitive threat of alternative service providers in Cequel's markets somewhat mitigate the aforementioned financial and business risks. The company continues to benefit from ongoing revenue growth and margin improvement opportunities given its still relatively under-penetrated ancillary service offerings, and notwithstanding noteworthy improvements over the past year. Also lending support to ratings is the good progress that has been realized by management overall in terms of integrating, updating and improving the operating performance of acquired cable systems over the past several years, which we expect will be replicated in the relatively modest-sized (83,000 customers, representing approximately 210,000 revenue generating units and $103 million of trailing twelve-month revenues, as reported) albeit expensive (more than 8x as estimated) NPG acquisition.

Ratings for the bank credit facility and the notes reflect both the overall probability of default, which Moody's has assessed as being consistent with a B1 PDR, and an average mean family loss given default expectation of 50%, in line with Moody's LGD Methodology and typical treatment for capital structures comprised of multiple creditor classes, as in this instance wherein both a first lien senior secured credit facility and unsecured notes are represented. The revised Ba2 (LGD2 - 24%) ratings for Cequel LLC's $2.3 billion senior secured term loan and $200 million revolver benefit from the effective and structural subordination of the B3 (LGD5-80%)-rated senior unsecured notes of Cequel totaling $1.825 billion, as increased by the current bond financing transaction and which in turn continues an ongoing shift in capital mix from OpCo to HoldCo debt and is of a sufficient enough magnitude to yield improved LGD rates for all creditors and rating upgrades for the senior-most bank debt.

Cequel's SGL-3 Speculative Grade Liquidity Rating indicates the company's deemed "adequate" liquidity profile as anticipated over the forward twelve-month liquidity rating horizon on a proforma basis for all pending transactions. Although we expect Cequel to generate sufficient cash flow to cover basic maintenance capital expenditure needs, we do anticipate greater potential reliance on the currently undrawn $200 million revolver as ongoing investments for the Project Imagine upgrade program continue. We are also mindful of the diminished liquidity profile proforma for the incremental debt service costs related to the new bond offering and the use of approximately two-thirds of current excess cash balances (which totaled $316 million at 9/30/10) to partially fund the pending NPG acquisition (and/or the preferred stock redemption and common stock dividends, given the fungible nature of money).

The stable outlook reflects our expectation that Cequel will again seek to reduce and sustain proforma debt-to-EBITDA leverage in the mid-5x range or better, aided by a minimum of mid-single-digit revenue growth and faster EBITDA growth, which combined should yield positive and more meaningful free cash flow after Project Imagine-related capital spending subsides in the out years. Additionally, we do not expect the company will look to incur any incremental debt for acquisitions or shareholder distributions in the near term, or at least until financial flexibility improves and reverts back to pre-transaction levels.

We do not anticipate positive rating momentum over the near term given Cequel's large projected capital spend and the ensuing adverse impact on free cash flow, as well as the company's relatively high leverage. We would, however, consider an upgrade once free cash flow approaches a mid-single-digit percentage of total adjusted debt and the company demonstrates an ability to reduce and sustain Moody's adjusted debt-to-EBITDA leverage at less than 5x, both while maintaining a good liquidity profile and given shareholder commitment to a more fiscally conservative capitalization.

The company's ratings could face downward pressure if operating performance weakens, including a greater than expected loss of subscribers and/or limited success in expanding voice and data service penetration, resulting in a worsening of the free cash flow profile and financial leverage reverting to historically higher levels that exceeds 6x on a sustained basis. Ratings could also face downward pressure if additional shareholder-friendly activities are consummated and/or if liquidity becomes constrained, either by narrowing of prospective covenant compliance cushion and reduction of available lines of credit, or otherwise.

The last rating action on Cequel Communications Holdings I, LLC was in April 2010 when Moody's assigned a B3 rating to the company's $600 million issuance (as upsized from an initially planned $500 million offering) of 8.625% Senior Unsecured Notes due 2017. Additional information can be found on www.moodys.com in the related Credit Opinion and LGD Assessment Report.

The principal methodologies used in this rating were the 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.

Cequel Communications Holdings I, LLC, headquartered in St. Louis, Missouri and doing business as Suddenlink Communications, is an intermediate holding company with cable operating company subsidiaries held by Cequel Communications, LLC serving approximately 1.3 million video subscribers (1.4 million customer relationships) on a proforma basis for all pending transactions. The company provides digital TV, high-speed Internet and telephone services for the home and office and generated revenues of approximately $1.7 billion for the twelve months ended September 30, 2010 ($1.8 billion on a proforma basis, as reported).

REGULATORY DISCLOSURES

Information sources used to prepare the credit ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service and 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 ratings.

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 and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

New York
Christina Padgett
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Assigns B3 Rating to Cequel Communications' Add-On; Bank Debt Upgraded to Ba2
No Related Data.
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