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22 Jun 2011
$300 million of Debt Affected
New York, June 22, 2011 -- Moody's Investors Service (Moody's) downgraded Broadview Networks
Holdings, Inc.'s (Broadview) $300 million senior
secured debt (due 2012) to Caa1 (LGD-4, 54%)and downgraded
the company's Corporate Family Rating (CFR) and Probability of Default
Rating (PDR) to Caa1 from B3. The outlook has been changed to stable
from negative. The $25 million ABL Revolver (approximately
$17.1 million outstanding as of March 31, 2011) is
not rated. The downgrade of Broadview's CFR reflects the
recent announcement that its recent tender offer for the senior secured
bonds due Sep 2012 has been canceled and Moody's expectation that
the company will continue to face challenges driven by a highly levered
balance sheet, strong market competition from other carriers and
cable companies, and in Moody's opinion, the equity
value in the capital structure could deteriorate if results should fall
short of expectations.
A summary of today's rating actions are listed below:
Issuer: Broadview Networks Holdings, Inc.
Corporate Family Rating, Downgraded to Caa1 (from B3)
Probability of Default Rating, Downgraded to Caa1 (from B3)
$300 million Senior Secured Notes due 2012, Downgraded to
Caa1 (from B3) (LGD-4, 54%)
Broadview's Caa1 rating reflect the company's weak capital structure
and the modest equity value which may deteriorate if results are below
plan (using Moody's valuation assumption of 4x - 5x equity)
with leverage as of March 31, 2011 around 5.1x (incorporating
Moody's standard adjustments and excluding the company's preferred
shares or 8.6x including partial debt attribution to the preferred).
Broadview's rating is also constrained by its lack of scale,
below average EBITDA margins as compared to Moody's rated comparable
firms and limited free cash flow generation. Moody's believes
the company's strategy of focusing on higher end customers with
new cloud based data products and advanced services is a sound strategy
however its highly levered balance sheet limits its ability to successfully
execute this goal. We remain concerned about Broadview's
ability to differentiate their services and successfully grow and maintain
high-margin customers in a highly competitive industry which includes
substantially larger competitors with stronger balance sheets.
Broadview's rating are somewhat supported by the company's
modestly improved adjusted EBITDA margins of 19.3% (from
16.6% in 2008) as a result of the company targeting larger
customers with higher margin products. Moody's expects the
company's focus on cloud based technologies and advanced product
offering to improve gross margins and reduce churn rates for higher end
customers. This could lead to modestly higher sales expenses as
the company focuses its sales force on selling higher end products.
The ratings derive support from an experienced management team with a
long history of operating as a CLEC.
Broadview's rating reflects Moody's expectation that the company
may face a tight liquidity profile if it is unable to refinance its revolver
in February 2012. We expect the company will be able to generate
sufficient cash to cover debt service requirements over the rating horizon,
but the company will likely use any remaining cash to fund capital expenditures
leaving little remaining free cash flow to repay debt. In the event
that results are less than expected, capex spending could be pressured
which could further reduce the company's competitive position which
is a concern given the large number of competitors that have substantial
resources to commit to advanced product offerings. As of the end
of March, 2011, the company had $26 million in cash
and cash equivalents and a $25mm revolver with $17 million
drawn that matures in February 2012. If the revolver is not refinanced
prior to maturity, the company is expected to have cash to meet
the revolver's maturity, but would reduce its liquidity position
going forward. The company's bonds mature in September 2012
and could prove difficult to refinance depending on market conditions.
The stable outlook reflects Moody's expectation that the company
will continue to generate sufficient cash flow to cover debt services
over the rating horizon, but will struggle to grow the business
and attract new customers as competition from other voice and data providers
Broadview's ratings could experience a downgrade should the company
begin aggressively losing customers resulting in meaningful revenue and
EBITDA declines and ultimately putting further pressure on the company's
valuation and leverage metrics. In addition, should the company
be unable to refinance its revolver and bond debt in a timely manner or
experience a prolonged period of negative free cash flow, Moody's
would consider a downgrade.
An upgrade to the ratings is unlikely in the near term, but Moody's
would consider an upgrade to Broadview's ratings if the company
is able to successfully refinance its debt obligations while demonstrating
the ability to attract and maintain new high margin customers resulting
in lower leverage, and EBITDA growth. A deleveraging strategic
transaction could also be a positive catalyst for an upgrade.
The principal methodology used in rating Broadview Networks Holdings,
Inc. was Moody's Global Telecommunications Methodology (December
2007). Other methodologies used include Loss Given Default for
Speculative Grade Issuers in the US, Canada, and EMEA,
published June 2009.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last Credit Rating Action and the rating history.
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 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.
Scott Van den Bosch
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service, Inc.
Moody's Investors Service, Inc.
Moody's Downgrades the Rating to Broadview's Notes and CFR to Caa1; Outlook changed to Stable
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