New York, September 10, 2020 -- Moody's Investors Service ("Moody's") assigned
a B2 Corporate Family Rating and B2-PD Probability of Default (PDR)
rating to Cablevision Lightpath LLC ("Lightpath", the
"Borrower", "Issuer", or "Company"),
ahead of the planned carve-out from Altice USA, Inc.
("Altice", unrated). Moody's assigned a
B1 rating to the Company's planned issuance of a new $700
million Senior Secured Bank Credit Facility including a new 5-year,
$100 million Revolving Credit Facility (due 2025) and a new 7-year,
$600 million Term Loan B (due 2027). Moody's also
assigned a B1 rating to the Company's planned issuance of new 7-year,
$450 million Senior Secured Notes due 2027 and assigned a Caa1
rating to the Company's planned issuance of new 8-year,
$415 million Senior Unsecured Notes due 2028 (the "Transaction
financing"). The outlook is stable.
On Tuesday, July 28, Altice announced that it has agreed to
sell 49.99% of Lightpath Group (materially, Cablevision
Lightpath LLC and its subsidiaries), its fiber enterprise business,
to Morgan Stanley Infrastructure Partners (MSIP) for an enterprise value
of $3.2 billion. Total cash proceeds to Altice are
expected to be about $2.3 billion. Altice will retain
a 50.01% interest in Lightpath Group, maintain control
of the company, and consolidate its financial results. However,
Lightpath will be refinanced on a standalone basis with a mix of equity
and debt non-recourse to Altice (the Transaction financing as described
above) and operated as a Joint Venture (JV). A portion of the debt
proceeds, along with MSIP's equity, will be used to acquire
the 49.99% interest in Lightpath Group. The transaction
is currently expected to close in Q4 2020 (the "Close").
We expect the JV to be consolidated into Altice financial reporting post-closing.
Assignments:
..Issuer: Cablevision Lightpath LLC
.... Corporate Family Rating, Assigned
B2
.... Probability of Default Rating,
Assigned B2-PD
....Senior Secured Bank Credit Facility,
Assigned B1 (LGD3)
....Senior Secured Regular Bond/Debenture,
Assigned B1 (LGD3)
....Senior Unsecured Regular Bond/Debenture,
Assigned Caa1 (LGD5)
Outlook Actions:
..Issuer: Cablevision Lightpath LLC
....Outlook, Assigned Stable
RATINGS RATIONALE
Lightpath's credit profile is constrained by governance risk,
specifically tolerance for very high leverage that will be approximately
6.7x (Moody's adjusted) at the close of the transaction,
falling to approximately 5.8x by the end of 2022, consistent
with management's target of 5.5x-6.0x net leverage.
We also expect that the private equity owner will seek cash returns on
its investment over its investment holding period. The small scale
and limited geographic and product diversity are also credit weaknesses,
in the face of increasing competition from larger players that are angling
to take share. Supporting the rating is the company's strong
and profitable business model, which provides a high degree of recurring
and predictable revenues from a large and diversified base of customers
including large-scale enterprises, wireless carriers,
and governments. The profitability and strength of the business
model are evident in EBITDA margins in the high 50% range.
Its large and dense regional fiber network, built over many decades,
in the Tier I metro New York market (NY, NJ, and CT) also
provides certain benefits including a favorable cost structure,
a large number of near-net sales opportunities, and an ability
to satisfy sustained demand for high-speed data-services.
The company also has good liquidity, supported by positive operating
cash flow, an undrawn $100 million revolving credit facility,
and covenant-lite loans. The credit profile also benefits
from a favorable maturity profile with no maturities for the next 5 years.
Lightpath's financial policies reflect moderate governance risks.
The company will be operated as a joint venture with Morgan Stanley Infrastructure
Partners (MSIP) the co-investor. Although MSIP has no put
options to exit its investment, MSIP is a private equity investor
that will seek to extract returns over time through either a sell down
of its interest or through the extraction of dividends or other shareholder
returns. Additionally, we understand the business will be
operated with a less than conservative financial policy that will target
a net leverage ratio (management adjusted) of 5.5x-6x after
peak leverage of 6.7x (Moody's adjusted) at the close of
the transaction (management's calculation of leverage is currently
materially similar to Moody's). We expect deleveraging through
a combination of organic EBITDA growth and voluntary debt repayments using
excess free cash flow.
The rapid and widening spread of coronavirus, deteriorating global
economic outlook, falling oil prices, and asset price declines
are creating a severe and extensive shock that is unprecedented in many
sectors, regions, and markets. The combined credit
effects of these developments are unprecedented. Moody's regards
the coronavirus outbreak as a social risk under its ESG framework,
given the substantial implications for public health and safety.
We believe the communication infrastructure sector has less exposure than
many others, with the expectation that the demand for data and other
services are likely to remain resilient. Broadband demand is accelerating
with increased, more evenly distributed usage driven by remote workers,
and a dramatic shift to online commerce and communications. Any
negative implications — disruptions to direct selling, slower
pace of construction, weakness in small and medium-sized
business, lower advertising sales, higher bad debt expense,
and disruptions to operations (component supply chains, construction
/ network upgrades) will be only a partial offset.
Moody's rates Lightpath's senior secured bank debt facilities and
senior secured instruments B1 (LGD3), one notch above the B2 CFR.
Secured lenders will benefit from junior capital provided by the senior
unsecured notes which are rated Caa1 (LGD5), two notches lower than
the CFR due to the subordinate priority of claims. The instrument
ratings reflect the probability of default of the company, as reflected
in the B2-PD Probability of Default Rating, an average expected
family recovery rate of 50% at default given the mix of secured
and unsecured debt in the capital structure, and the particular
instruments' ranking in the capital structure. The senior secured
bank credit facility and senior secured notes are secured by a perfected
first-priority security interest in substantially all of the assets
of the Borrower and the Guarantors. The Guarantors exclude Cablevision
Lightpath NJ LLC which represents about 33-34% of consolidated
EBITDA. The equity interests in Cablevision Lightpath NJ LLC are
excluded from the collateral package. The collateral includes a
perfected first-priority security interest in all of the equity
interests of the Borrower held by Lightpath Holdings, LLC the "Parent")
and any intercompany loans from the Parent to the Borrower on a par-passu
basis).
The draft credit agreement contains certain provisions that create risk
to lenders including carve-outs from protective covenants that,
subject to certain limitations, allow incremental debt capacity
and the ability to transfer assets or collateral out of the restricted
group. Specifically, the issuer can and is permitted to:
• Incur an unlimited amount of secured debt, pari-passu
with existing, up to 4.75x net secured leverage, plus
the greater of $225 million or 100% of the last two quarters
of annualized (L2QA) covenant adjusted EBITDA, free and clear,
plus $115 million and 50% of L2QA EBITDA under a general
carve-out basket; and
• Designate any existing or subsequently acquired or organized subsidiary
as an unrestricted subsidiary, and will be able to contribute assets
to an unrestricted subsidiary in an unlimited amount so long as net total
leverage is equal to or less than 6.50x on a pro forma basis,
plus the greater of $115M and 50% of L2QA EBITDA under a
general basket and the greater of $70M and 30% of L2QA under
a general restricted payment basket.
We believe the draft agreement, however, (i) requires guaranteeing
subsidiaries to provide guarantees if wholly-owned and requires
non-wholly owned subsidiaries to provide guarantees if they guarantee
other material debt, reducing the risk of future guarantee releases,
and (ii) does not allow for leverage-based step-downs in
the requirement that net asset sale proceeds prepay the loans, helping
preserve lenders' control over collateral.
Our view of the covenant provisions above are based on draft provisions
during the marketing period and subject to change
Outlook
Our outlook reflects revenue growth in the low single-digit percent
over the next 12-18 months, to just under $400 million,
generating close to $230 million in EBITDA on margins in the high
50% range. We expect leverage to be high, near 6.7x
at close, but falling to about 5.8x over the next 12-18
months with EBITDA growth and mandatory debt repayment. We expect
CAPEX to revenues to average 25% and average borrowing costs to
be approximately 6%. Free cash flow to debt will rise from
1.9% at close, to 3.8% at the end of
2022. Interest coverage (EBITDA-CAPEX/Interest) will rise
from 1.3x at close, to 1.6x at the end of 2022.
All figures are Moody's adjusted unless otherwise noted.
We expect liquidity to remain good.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could consider an upgrade if:
• Gross debt/EBITDA (Moody's adjusted) was sustained below 5.0x,
and
• Free cash flow to gross debt (Moody's adjusted) was sustained above
5%
An upgrade could also be considered if scale was larger, there was
more geographic or product diversity, or financial policy was more
conservative.
Moody's could consider a downgrade if:
• Gross debt/EBITDA (Moody's adjusted) is sustained above 6.5x,
or
• Free cash flow to gross debt (Moody's adjusted) is sustained below
low single digit percentage
A downgrade could also be considered if liquidity deteriorated,
performance weakened materially, or financial policy became more
aggressive.
Headquartered in Long Island City, New York, Cablevision Lightpath
LLC serves over 6.5 thousand customers in three states including
New York, New Jersey, and Connecticut. It delivers
a range of data, voice, and managed services to enterprise
customers, wireless carriers, governments, and other
large-scale entities. Its 18,600 fiber, 8,800
route-mile network connects more than 11,400 buildings.
The company is a joint venture, 50.01% owned and controlled
by Altice USA, a public company majority owned and controlled by
Patrick Drahi. Morgan Stanley Infrastructure Partners (MSIP) will
own 49.99%. Revenue for the last twelve months ended
June 30, 2020 was approximately $300 million.
The principal methodology used in these ratings was Communications Infrastructure
Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1076924.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, 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 issued the credit rating is available on www.moodys.com.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Jason Cuomo
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
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