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Rating Action:

Moody's assigns B1 rating to tw telecom's new senior notes, downgrades existing senior notes to B1 from Ba3 and affirms Ba3 CFR; outlook stable

27 Sep 2012

Approximately $400 million of new debt rated

New York, September 27, 2012 -- Moody's Investors Service has assigned a B1 rating to the proposed $400 million senior unsecured notes due 2022 to be issued by tw telecom holdings inc. ("TWTH"), an indirect wholly-owned subsidiary of tw telecom inc. ("TWTC" or the "company"). As part of this rating action, Moody's also downgraded the rating on the 8% senior unsecured notes at TWTH to B1 (LGD-5, 71%) from Ba3 (LGD-4, 58%). Moody's also affirmed TWTC's Corporate Family Rating (CFR) and Probability of Default Rating (PDR), both at Ba3, the SGL-1 Speculative Grade Liquidity Rating as well as the Baa3 ratings on the existing credit facilities at TWTH. The rating outlook is stable.

New issue proceeds are expected to be used to pre-fund the cash conversion obligation for the 2.375% senior convertible debentures (approximately $374 million outstanding) to the extent holders elect to convert the debentures and the company chooses to settle the conversion obligation in cash. Proceeds may also be used to redeem the obligation when it becomes callable in April 2013 if any portion of the obligation has not converted. Since the refinance transaction is neutral to TWTC's credit profile, the company's CFR, PDR and SGL remain unchanged. However, to reflect the expected change in the composition of the capital structure over the next twelve months as a result of this financing, which increases senior unsecured debt at TWTH and eliminates the structurally subordinated convertible debt at TWTC, TWTH's senior notes will now absorb a higher proportion of losses in a distressed scenario under Moody's Loss Given Default Methodology, and were downgraded to B1.

Ratings Assigned:

..Issuer: tw telecom holdings inc.

$400 Million Senior Unsecured Notes due 2022 -- B1 (LGD-5, 71%)

Ratings Downgraded:

..Issuer: tw telecom holdings inc.

$430 Million 8% Senior Unsecured Notes due March 2018 to B1 (LGD-5, 71%) from Ba3 (LGD-4, 58%)

Ratings Affirmed:

..Issuer: tw telecom inc.

Corporate Family Rating -- Ba3

Probability of Default -- Ba3

Speculative Grade Liquidity - SGL-1

$374 Million 2.375% Senior Unsecured Convertible Debentures due April 2026 -- B2 (LGD-5, 89%)

..Issuer: tw telecom holdings inc.

$80 Million Senior Secured Revolving Credit Facility due December 2014 -- Baa3, LGD assessment revised to (LGD-2, 15%)

$474 Million Senior Secured Term Loan B due December 2016 - Baa3, LGD assessment revised to (LGD-2, 15%)

RATINGS RATIONALE

TWTC's Ba3 Corporate Family Rating reflects the company's successful track record of revenue growth and operational execution, while recognizing the challenging position as a competitive communications provider. We expect TWTC to operate at adjusted debt to EBITDA leverage in the range of 2.5x to 2.8x (incorporating Moody's standard adjustments) over the next 12 to 18 months, with moderate free cash flow generation, given that the business remains highly capital intensive. Debt repayment will be limited by TWTC's plans to utilize free cash flow to repurchase shares.

Despite elevated levels of capital spending and relatively high leverage, the company's strong operating performance driven by consistent revenue growth in the enterprise segment and strong margins due to TWTC's significant fiber infrastructure, are credit positives for the ratings. TWTC's results reinforce its differentiated business model that relies on a fiber-rich network with direct connections to major customers, eliminating the need to rely on incumbent carriers for a critical portion of its last mile connections. TWTC continues to have success targeting its medium-to-large enterprise customers rather than small-to-medium sized business (SMB) customers, and the company's stake is built on near-nationwide operating scale in 75 markets in the US.

In rating TWTC's debt instruments, Moody's has taken a forward look with respect to the composition and specific levels of debt at the company's various legal entities. TWTC is a first-tier parent holding company and debt issued at this entity does not benefit from upstream operating company guarantees, making it structurally subordinated to the debt residing at TWTH. Given that proceeds from this financing will be used to retire the entire tranche of the TWTC convertible obligation (the most junior debt in the capital structure), the one-notch downgrade to B1 (LGD-5, 71%) on the existing TWTH senior notes reflects the greater loss absorption that this class of debt will now sustain relative to the reduced liabilities at TWTC in a distressed scenario under Moody's Loss Given Default Methodology.

Rating Outlook

The stable rating outlook reflects Moody's expectations that despite the sluggish economic environment, TWTC's EBITDA will continue to grow. Moody's also believes the company will continue to effectively manage cash spending. Given that the cash proceeds from this debt financing could remain on TWTC's balance sheet until April 2013 when the convertible debt is expected to be called, we expect TWTC's total debt to EBITDA (incorporating Moody's standard adjustments) will temporarily increase to roughly 3.5x before returning to a range of 2.5x to 2.8x by year end 2013.

What Could Change the Rating - Up

An upgrade is unlikely until Moody's believes the operating pressure on competitive telecom providers will be alleviated over a sustained period. However, upward rating pressure could develop if earnings growth leads to stronger free cash flow generation such that TWTC's free cash flow exceeds 10% of its total adjusted debt, and the company's leverage, as measured by total debt to EBITDA on a Moody's adjusted basis, is expected to be maintained below 2.5x.

What Could Change the Rating - Down

The rating and/or outlook is likely to come under pressure if TWTC's operating performance deteriorates due to increasing competition, changes in the regulatory environment or persistent weakness in the economic environment beyond our current expectations, such that free cash flow turns negative or leverage cannot be maintained below 3.5x total debt to EBITDA (Moody's adjusted). Additionally, if continuous stock repurchases deplete cash balances, ratings could be pressured.

The assigned ratings are subject to review of final documentation and no material change in the terms and conditions of the transaction as advised to Moody's. Upon full redemption of the 2.375% senior convertible debentures due 2026 Moody's will withdraw the ratings.

The principal methodology used in rating tw telecom inc. was the Global Telecommunications Industry Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the US, Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

With head offices in Littleton, Colorado, tw telecom inc. is a competitive communications provider. The company provides managed network services, Internet access, virtual private network, voice and data services, and network security to enterprise organizations and communications services companies throughout the US. TWTC's footprint extends to 75 of the top 100 markets in the US. Revenue for the twelve months ended June 30, 2012 totaled approximately $1.4 billion.

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, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics 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.

Gregory A Fraser
Vice President - Senior 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

Bill Wolfe
Senior Vice President
Corporate Finance Group
(416) 214-1635

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 assigns B1 rating to tw telecom's new senior notes, downgrades existing senior notes to B1 from Ba3 and affirms Ba3 CFR; outlook stable
No Related Data.
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