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Global Credit Research - 09 Nov 2010
Approximately $335 Million of Rated Debt Affected
New York, November 09, 2010 -- Moody's Investors Service assigned B2 ratings to RCN Corporation's
(RCN or the company, dba Sidera Networks) new $45 million
Term Loan C and $25 million incremental revolving credit facility.
Both the term loan and incremental revolver are being issued as amendments
to the existing $265 million ($25 million revolver,
$240 million term loan B) of secured credit facilities.
The new combined $50 million revolver is due August 2015 and the
term loan is due August 2016, unchanged from prior. Both
the term loan and revolver are rated B2, in line with the company's
Corporate Family Rating (CFR) which is unchanged. Moody's
maintains a B3 Probability of Default Rating ("PDR") for RCN, also
unchanged. Net proceeds from the term loan will be used to acquire
Cross Connect Solutions, Inc. (CCS), a collocation
provider in Philadelphia, PA. The revolver will be undrawn
at inception. The company intends to use this added liquidity for
opportunistic acquisitions going forward. The rating outlook is
Moody's has taken the following rating actions:
..Issuer: RCN Corporation
....Corporate Family Rating, B2
....Probability of Default Rating, B3
....$50 Million Senior Secured Revolving
Credit Facility due 2015, Assigned B2 (LGD3-34%)
....$285 Million Senior Secured Term
Loan due 2016, Assigned B2 (LGD3-34%)
RCN's B2 corporate family rating reflects the company's small scale,
the competitive environment in which it operates and the inherent capital
intensity of the CLEC business. The acquisition of CCS is a move
into the collocation business, an area that is complementary to
RCN Corp.'s fiber assets. CCS has demonstrated strong
growth and very strong margins, both of which will improve the profile
of RCN Corp. The acquisition price of over 9x EBITDA will result
in higher leverage initially, but the stability of collocation revenues
partially compensates for this.
RCN's ratings are supported by the company's ability to deliver
growth through a tough environment, having achieved annual revenue
growth throughout the recent recession, while many wireline providers
are still witnessing revenue declines. In Moody's view, demand
for the company's services and the stability of its contracted,
recurring revenues support the rating. However, revenue growth
has slowed in recent quarters following the separation from the former
cable parent. Management attributes the weak top line growth to
a loss of sales traction and is implementing a more focused sales organization
with experienced sales leadership. Moody's is concerned about the
high capital expenditures needed to drive revenue growth, particularly
with the increase in leverage and the company's stated intent to
remain acquisitive. Conversely, without profitable growth,
the company's leverage and coverage metrics are unlikely to improve
as its cash flow profile does not offer the opportunity to deleverage
by reducing debt. Recent sales weakness combined with higher leverage
raises concern about the company's credit metrics going forward.
The stable outlook is based on Moody's view that the company, with
adequate liquidity to fund growth, should be able to capitalize
on favorable near-term wholesale bandwidth capacity trends.
Moody's believes that the company has good liquidity, as the company
is expected to be free cash flow positive for FY 2010, with full
access to its $50 million revolver. Additionally,
Moody's notes that over 90% of the company's capital expenditures
are success-based or growth driven, which reduces the risk
of building ahead of demand.
The ratings for the debt instruments reflect both the overall probability
of default for RCN, to which Moody's has assigned a B3 PDR,
and a below-average mean family loss given default assessment of
35% (or an above-average mean family recovery estimate of
65%), in line with Moody's LGD Methodology and typical treatment
for an all-first-lien senior secured debt capital structure.
RCN's ratings could come under pressure if adjusted leverage fails
to trend below 4.5x on a sustainable basis, which may result
from additional debt-funded acquisitions or if heightened competition
or churn threatens the company's sales or earnings growth. Ratings
could also come under pressure if the company's liquidity profile is materially
Upward rating pressure could build if the company significantly diversifies
its revenue base either geographically or through acquisitions that do
not weaken the company's credit metrics. Additionally, if
the company's free cash flow-to-total debt ratio exceeds
10% on a sustainable basis, an upgrade may be considered.
The last rating action for RCN Corporation was on October 14, 2010,
when Moody's assigned permanent ratings and removed the provisional
ratings based on the separation transaction originally proposed in May
and completed in the third quarter.
The principal methodologies used in this rating were Moody's Global Telecommunications
Industry Methodology published in December 2007 and Loss Given Default
for Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
RCN Corporation (dba Sidera Networks) is a US-based broadband infrastructure
provider. The company's fiber network serves wireless providers,
carriers, and enterprise customers in the Northeast, mid-Atlantic,
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 Rates RCN Corporation's New Term Loan and Incremental Credit Faciliity B2
250 Greenwich Street
New York, NY 10007
No Related Data.
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