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Rating Action:

Moody's Assigns Caa1 CFR to Cogent Communications, Rates New Notes B2

10 Jan 2011

Approximately $350M in Debt Affected

New York, January 10, 2011 -- Moody's Investors Service has assigned a Caa1 corporate family rating (CFR) and a Caa1 probability of default rating (PDR) to Cogent Communications, LLC ("Cogent" or "the Company"). Additionally, Moody's has assigned a B2 rating to Cogent's proposed $150 million Senior Secured Notes due 2018 ("the 2018 notes"). Cogent intends to use the proceeds of the new debt issuance for general corporate uses which may include, among other things, network expansion or returning capital to equity holders via share repurchase or dividends. The B2 rating reflects the senior secured status of the notes and subsidiary guarantees. The 2018 notes are rated two notches higher than the company's CFR due to the loss protection afforded by the company's existing unsecured convertible notes and considerable operating and capital leases which Moody's considers unsecured debt. Of particular note, however, the loss protection offered by the convertible notes is likely to disappear in 2014, when holders are able to put the debt back to the company, at which time the rating on the 2018 notes would converge towards the company's CFR. The outlook is stable.

Moody's has taken the following rating actions:

Assignments:

....Issuer: Cogent Communications, LLC

....Corporate Family Rating, Caa1

....Probability of Default Rating, Caa1

....$150 Million Senior Secured Notes due 2018, Assigned B2 (LGD2-24%)

.Speculative Grade Liquidity -- SGL 2

.Outlook: Stable

RATINGS RATIONALE

Cogent's Caa1 corporate family rating reflects its high leverage, small scale and the highly competitive environment in which it operates, as well as the capital intensity of the industry. Moody's projects year-end 2010 leverage (debt/EBITDA, Moody's Adjusted, pro-forma for the proposed offering) to be 4.8x and free cash flow to be approximately 3% of total debt. The rating is supported, however, by Cogent's broad base of recurring revenues which have grown steadily, even through a difficult economic backdrop and the downward trend of service pricing. Additionally, the company's low cost structure and targeted niche sales approach, although possibly limiting Cogent's addressable market, enable it to compete with companies which have higher legacy cost structures.

The company has strong margins, but requires significant capex (20% of revenues, Moody's 2010 estimated) to keep growing. Cogent has two main business segments, bulk-internet traffic transport and dedicated Ethernet internet access services. Within the internet transport segment, Cogent claims to carry over 15% of global internet traffic through its U.S. and European networks. Cogent competes primarily on price in this segment, a strategy enabled by its low cost infrastructure which was assembled through timely acquisitions of distressed assets during the post-apocalypse of the 2002-2004 internet bust. The internet data transport business has a commodity-type structure, with fierce price competition and significant excess industry capacity. Although utilization remains low on this network, it is unlikely that Cogent will be able to maintain its scrapyard cost structure when compelled to add capacity to the network.

Cogent sells internet access via Ethernet-over-fiber to enterprise customers and telecom and data service providers. To differentiate, Cogent targets a specific cross section of the industry, which could limit growth opportunities as profitable sales targets potentially get harder to identify. Cogent's fiber network is primarily comprised of IRU's, which enable the company to economically reach customers. But, unlike a traditional carrier or CLEC which often own fiber cables with significant spare un-lit capacity, Cogent's IRU-based fiber plant offers minimal spare capacity for future requirements. Further, we feel that the IRU-based plant has minimal market value should Cogent need to raise funds to bolster liquidity.

Cogent's new $150 million 2018 notes are rated B2, LGD 2-24% by Moody's, two notches higher than the company's Caa1 CFR. The two-notch lift is due to the loss protection provided by the company's $90 million in convertible notes and approximately $110 million in capital leases and $230 million in operating leases. The 1.0% coupon convertible notes mature in 2027, but are putable at par in 2014. The notes currently trade at an approximate 20% discount to par. Moody's anticipates that the company will be required to redeem these convertible notes at the first put date, and hence downward rating pressure on the currently B2-rated senior secured notes is likely to ensue.

Moody's views Cogent's liquidity as adequate, and projects the company will exit 2010 with over $50 million in cash, excluding the proceeds from the $150 million 2018 notes. Cogent does not maintain a revolving credit facility.

Cogent's ratings could face downward pressure if leverage were to trend higher than 5x or if free cash flow materially declines. Any deterioration of Cogent's operating or financial metrics or liquidity could lead to negative rating action. Future changes in capital mix, with particular reference to the likely elimination of junior-ranking debt when the convertible notes become putable in 2014, as previously referenced, would also likely trigger negative rating action(s) for the senior secured debt.

Moody's could upgrade Cogent's ratings if the company were to grow revenues or reduce debt such that leverage is likely to be sustained below 4x (Total debt/EBITDA, Moody's adjusted).

The principal methodologies for ratings were Global Telecommunications Industry published in December 2010, Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009, and Speculative Grade Liquidity Ratings published in September 2002

This rating action is the first assignment Moody's has made to Cogent Communications, LLC.

Cogent Communications, with headquarters in Washington, DC is a multinational Tier 1 Internet service provider. The company offers Internet access and data transport over its fiber optic, IP data network. Cogent offers colocation via 41 Internet Data Centers and serves business and service provider companies with Ethernet-over-fiber services for Internet access. The Company generated $257 million in revenues for the last four quarters ending 9/30/2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning 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 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
Dennis Saputo
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 Caa1 CFR to Cogent Communications, Rates New Notes B2
No Related Data.
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