Approximately $3.1 billion of debt rated
New York, July 11, 2012 -- Moody's Investors Service affirmed the B2 corporate family rating (CFR)
of WideOpenWest Finance, LLC (WOW), the B1 rating on the first
lien credit facility, and the Caa1 rating on the senior unsecured
bonds based on revisions to the proposed debt funding for its acquisition
of Knology, Inc. (Knology, B1 CFR). Moody's
also assigned a Caa1 rating to the proposed senior subordinated bonds.
The transaction as currently proposed consists of a a $200 million
first lien revolver (expected draw of about $50 million at close
compared to previous expectations for it to be undrawn), a $1,920
million first lien term loan (no change), $700 million of
senior unsecured bonds ($1020 million previously), and newly
proposed $320 million senior subordinated notes.
WideOpenWest Finance, LLC
... Affirmed B2 Corporate Family Rating
... Affirmed B2 Probability of Default Rating
....Senior Subordinated Bonds, Assigned
Caa1, LGD6, 94%
....Senior Unsecured Bonds, Affirmed
Caa1, LGD adjusted to LGD5, 82% from LGD5, 86%
... $200 million First Lien Revolver,
Affirmed B1, LGD3, 32%
... $1,920 million First Lien Term Loan,
Affirmed B1, LGD3, 32%
Outlook, Stable
RATINGS RATIONALE
Moody's now expects modestly negative cash flow in 2013 due to higher
interest rates than the deal as originally proposed, and the B2
CFR is weakly positioned. However, the $200 million
revolver provides good liquidity to manage through the integration and
to fund costs to acheive synergies. Moody's expects modestly
positive free cash flow in 2014 (less than 3% of debt) as the company
benefits from cost savings and accelerated growth of the combined entity's
commercial business. Additional benefits of the proposed merger
include greater scale and diversity.
Junior capital from the senior subordinated bonds results in a modest
improvement to the LGD rate on the senior unsecured bonds, but the
subordinated bonds represent only about 10% of the proposed debt
capital structure and are therefore not sufficient to give ratings uplift
to the senior unsecured bonds. The higher LGD rate on the senior
subordinated bonds indicates Moody's opinion that these bondholders
would likely experience a greater loss in the event of a default than
senior unsecured noteholders.
The transaction will increase leverage to approximately 7 times debt-to-EBITDA
compared to current WOW leverage in the low to mid 6 times range.
Moody's expectation that leverage will remain above 6 times debt-to-EBITDA
and that WOW will generate minimal free cash flow over the next two years
given the heavy debt load and substantial capital expenditures drives
its B2 CFR. WOW faces the challenge of operating in an intensely
competitive environment and executing on both its combination with Knology
and a billing system conversion, all with a highly leveraged credit
profile. The maturity of the core video product limits growth potential,
but Moody's expects the high speed data product and the commercial business
will facilitate EBITDA expansion, supported by a high quality network
in most of the company's footprint. Declining capital intensity
as a percentage of revenues, continued EBITDA growth, and
cost reductions create the potential for increasing free cash flow and
lower leverage after the next two years, but we expect acquisitions,
shareholder distributions, or some combination of these to keep
leverage around 6 times debt-to-EBITDA and free cash flow
below 5% of debt.
The stable outlook incorporates expectations for leverage to fall below
7 times debt-to-EBITDA over the next 18 months and for maintenance
of good liquidity. The stable outlook also assumes successful conversion
of WOW's billing system and smooth integration of the two companies.
Sustained debt-to-EBITDA above 7 times, whether due
to weak performance, acquisitions, or incremental sponsor
dividends could pressure the company's ratings downward. Evidence
of challenges with either the integration or the billing system conversion,
such as erosion of subscribers or significant margin deterioration,
could also have negative ratings implications. Deterioration of
the liquidity profile or expectations for sustained negative free cash
flow could also result in a negative rating action.
Avista's aggressive fiscal policy including capital distributions and
high leverage, and the magnitude of improvement in credit metrics
required to sustain a higher rating impede upward ratings momentum over
the next few years, and a positive action is highly unlikely without
a commitment to a stronger fiscal policy. We would consider a positive
rating action based on expectations for sustained leverage around 5 times
debt-to-EBITDA range and free cash flow to debt in the mid
to high single digits, as well as evidence of ability to maintain
or improve its competitive position.
As "overbuilders," both Knology and WOW historically built or acquired
networks in regions overlapping that of larger incumbent cable operators
and attempt to differentiate with high quality product offerings and efficient
but localized customer service.
The principal methodology used in rating WOW was the Global Cable Television
Industry Methodology published in July 2009. Other methodologies
used include Loss Given Default for Speculative-Grade Non-Financial
Companies in the U.S., Canada and EMEA published in
June 2009. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
With its headquarters in Englewood, Colorado, WideOpenWest
Finance, LLC (WOW) is a competitive broadband provider offering
cable TV (approximately 468,000 subscribers), high speed Internet
services (442,000) and telephony (261,000) to residential
and commercial customers in Illinois, Michigan, Ohio and Indiana.
Its revenue for the twelve months through March 31, 2012,
was approximately $627 million. Avista Capital Partners
owns the company.
With its headquarters in West Point, Georgia, Knology,
Inc. (Knology) provides video, voice, data, and
communications services to residential and business customers in the southeastern
and midwestern United States. As of December 31, 2011,
it served approximately 257,000 video, 262,000 high
speed data, and 277,000 telephone subscribers. Knology
generated revenue of approximately $523 million for the twelve
months through March 31, 2012.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the 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 considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a 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 the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Karen Berckmann
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's affirms WOW's B2 CFR and Caa1 on senior unsecured, assigns Caa1 to senior subordinated
