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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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