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Related Issuers
Rating Action:

Moody's Downgrades TelePacific to B3 on New Debt Raise; Outlook is Positive

16 Feb 2011

New York, February 16, 2011 -- Moody's Investors Service has assigned a B3 (LGD4-50%) rating to US Telepacific Corporation's ("TelePacific" or the "Company") new senior secured facilities, consisting of a $25 million revolver and a $435 million term loan. The proceeds of the new financing will be used to repay the existing debt, to fund the cash portion of the Covad Wireless acquisition, and for general corporate purposes, which may include additional acquisitions over the next twelve months. Moodys will withdraw the ratings on the existing senior secured credit facility at closing.

As part of the rating action, however, Moody's downgraded TelePacific's Corporate Family Rating (CFR) to B3 from B2 and the Probability of Default Rating (PDR) to B3 from B2 reflecting the increase in TelePacific's financial leverage (Moody's adjusted Debt/EBITDA, including capitalized operating leases and debt treatment of preferred stock) to more than 5.4x proforma for the transaction, which is above the expected 4.0x leverage level commensurate with the former B2 rating. In addition to the increased leverage, Moody's believes that the company's deleveraging path and meaningful free cash flow generation will take longer than initially anticipated, as the company integrates recent acquisitions and spends cash to expand its product portfolio.

Moody's also revised the rating outlook to positive from stable, reflecting the positive steps the company is taking to reposition its product portfolio to remain competitive and address its cost structure.

Assignments:

Senior Secured 1st Lien Revolving Credit Facility---B3 (LGD4-50%)

Senior Secured 1st Lien Term Loan—B3 (LGD4-50%)

Corporate Family Rating .. Downgraded to B3 from B2

Probability of Default Rating .. Downgraded to B3 from B2

Outlook changed to Positive from Stable

RATINGS RATIONALE

TelePacific's B3 corporate family rating reflects the Company's high adjusted Debt/EBITDA leverage for a competitive telecommunications company, the execution risk of integrating the Covad Wireless and O1 Communications acquisitions, along with the challenge of repositioning its product portfolio to provide more data-centric products to its customers and adding more network capacity to reduce the reliance on the incumbents for the last mile access. Moody's views the company's product repositioning to Ethernet over copper, data center, and wireless services as strategically appropriate to meet the growing competition from cable operators and incumbent telcos targeting small and medium sized business customers (SMB's). However, to implement these initiatives TelePacific will increase capital spending and hire more salespeople over the next year, thus straining free cash flow generation.

The rating is supported by TelePacific's postion as the largest CLEC in the California and Nevada markets, which are less competitive than other regions of the country, such as the Northeast. Moody's believes that the Company has weathered the worst of the macroeconomic pressures in the California and Nevada markets, and an improving economy and product mix should set the stage to maintain revenue growth. Thus, although declining customer accounts have had a negative impact on the top line, TelePacific has worked to reduce churn and increase monthly revenues from its customer base.

The positive outlook reflects Moody's view that as the Company has successfully deleveraged from about 5.7x in early 2010 to 5.0x at year end 2010, on a Moody's-adjusted basis, if it successfully deploys its enhanced product set and achieves synergies from its acquisitions, it should be in a position to delever towards the 4.0x adjusted leverage level by year end 2012. However, the higher debt service costs and ramping up of growth initiatives in the near term are expected to delay meaningful free cash flow generation until after 2012.

Moody's also acknowledges the support that TelePacific's sponsors provided in the past, by extending a $20 million letter of credit facility to backtstop a run up of accouts payable in addition to amending the terms of the preferred stock holdings, to which Moody's ascribes 25% debt attribution.

Moody's believes the company will have good liquidity, aided by its cash balances and full access to its unfuded $25 million revolver. Moody's also expects the Company to have sufficient cushion under its bank facility covenants.

What Could Change the Rating - Up

Given the Company's execution challenges over the next 12-24 months, upward rating pressure is unlikely at this time. However, positive ratings actions could occur if the Company is successful in turning around performance and deleveraging, such that its adjusted Debt/EBITDA leverage is maintained below 4.0x.

What Could Change the Rating - Down

Moody's will likely lower TelePacific's ratings if the Company is unable to deliver revenue and EBITDA growth or if its growth plans consume more cash resources than envisioned, its adjusted Debt/EBITDA leverage does not fall below 5.0x and free cash flows remain negative over the rating horizon.

Moody's last rating action for TelePacific was on January 26, 2010 when Moody's upgraded the company's CFR to B2, and assigned a B2 to its senior secured credit facility due 2015.

The principal methodology used in this rating was Moody's Global Telecommunications Industry, published in December 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, confidential and proprietary Moody's Investors Service information, and 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 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
Gerald Granovsky
VP - Senior Credit Officer
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 Downgrades TelePacific to B3 on New Debt Raise; Outlook is Positive
No Related Data.
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