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Global Credit Research - 09 Nov 2010
New York, November 09, 2010 -- Moody's Investors Service assigned a first time B2 corporate family rating
and a B1 probability of default rating to Vonage Holdings Corp.
("Vonage" or the company), a provider of voice and messaging
services over broadband networks mainly for customers in the United States.
Moody's also assigned a B2 rating to the company's new $200
million senior secured term loan, being arranged for co-borrowers
Vonage and its wholly-owned operating subsidiary Vonage America,
Inc. The company plans to use the borrowings along with $106
million of balance sheet cash to refinance currently outstanding debt
and pay the associated premiums and fees. The rating outlook is
Moody's has taken the following rating actions:
..Issuer: Vonage Holdings Corp.
.Corporate Family Rating, Assigned B2
.Probability of Default Rating, Assigned B1
..Issuer: Vonage Holdings Corp., Vonage
.$200 million Senior Secured Term Loan, Assigned
B2 (LGD4, 69%)
Rating Outlook: Stable
Vonage's B2 Corporate Family Rating (CFR) largely reflects Moody's
concerns about the long-term sustainability of the standalone Voice
over Internet Protocol (VoIP) long distance provider model, which
incorporates Moody's view that revenues will be pressured over the
long-term due to a growing reluctance from customers to pay for
long distance calling, intensifying competition from bundled voice
plans from cable companies and traditional telecommunications companies,
and the company's exposure to changes in international and domestic
termination fees for calls to landline phone numbers. In addition,
Moody's remains concerned about the potential for Vonage to cannibalize
its revenue base, as the company may be challenged to generate incremental
revenue from customer calls within the Vonage network. In addition,
the continued commoditization of the international long distance (ILD)
business bodes poorly for long-term profitability growth.
The ratings are supported, however, by Vonage's very
good liquidity, modest leverage and free cash flow generation driven
by limited capital expenditure needs, declining churn due to loyalty
from ILD customers, and near-term growth prospects from more
homes adopting higher speed broadband services. The B1 Probability
of Default Rating also takes into account the high excess cash flow sweep
that should enable the company to rapidly delever, and thereby convey
a reduced likelihood of default relative to that more typically characterized
by a B2-rated (CFR) company.
Moody's also recognizes the near-term upside that comes from
Vonage's continued mix shift into international markets, given
that Vonage's ILD customers tend to have higher priced plans and
lower churn. In addition, still-rapidly growing Internet
usage across the world, and the company's opportunities to
leverage scale on Internet carrier costs and termination fees, are
encouraging in the near-term.
The stable outlook reflects Moody's view that Vonage will maintain adjusted
debt/EBITDA below 2.0x.
Moody's expects Vonage will have very good liquidity over the next
twelve months, as pro forma for FYE 2010 Moody's projects
the company will have about $62 million in cash or equivalents
and generate free cash flow of $135 million for the year.
The rating agency noted that much of the free cash flow realized in 2010
was due to working capital changes resulting from earlier receipts of
payments on promotional plans, and that it subsequently did not
expect free cash flow to be sustainable at such a level. Going
forward, Moody's expects annualized free cash flow to normalize
at a $60 million range over the next several years. The
company has a 50%/75% tiered excess cash flow sweep attached
to the new term loan.
The stable rating outlook reflects Moody's view that Vonage's VOIP
calling business model will remain viable in the near to medium term as
it generates flat to modest sales growth in the next few years,
and will minimize EBITDA declines resulting from higher expenses due to
increased international call volume. Moody's also expects
the company to retain a disciplined capital structure with an adjusted
debt/EBITDA leverage below 2.0x.
What Could Change the Rating -- UP
As the long term business sustainability is the primary driver influencing
the CFR, an upgrade is unlikely over the next 12-18 months.
However, upward rating pressure would ensue if Vonage is successfully
able to profitably diversify its customer base, such that its revenues
approach $1 billion and adjusted EBITDA exceeds $150 million
and leverage remains below 1.5x.
What Could Change the Rating - DOWN
Downward rating pressure could develop if the company's EBITDA and
free cash flow decline and the company is unable to reduce its adjusted
Debt to EBITDA leverage below 2.0x. Also, a downgrade
may be considered if technological issues impair the company's operations.
This is the first time that Moody's has rated Vonage.
The principal methodologies used in this rating were the Global Telecommunications
Industry published in December 2007, Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009, and Moody's Approach to Global
Standard Adjustments in the Analysis of Financial Statements for Non-Financial
Corporations - Part I published in February 2006.
Vonage, located in Holmdel, New Jersey, is a provider
of voice and messaging services to approximately 2.4 million subscribers
across the United States and abroad. The company generated about
$890 million in revenues for the trailing twelve months ending
September 30, 2010.
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 assigning
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.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns B2 corporate family rating to Vonage Holdings Corp.
250 Greenwich Street
New York, NY 10007
No Related Data.
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