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Global Credit Research - 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:
....Issuer: Cogent Communications,
....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
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
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
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.
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
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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 Caa1 CFR to Cogent Communications, Rates New Notes B2
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