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Global Credit Research - 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
...Speculative Grade Liquidity Rating, assigned
...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
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%)
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)
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
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
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
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).
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
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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 B3 Rating to Cequel Communications' Add-On; Bank Debt Upgraded to Ba2
250 Greenwich Street
New York, NY 10007
No Related Data.
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