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Rating Action:

Moody's assigns B3 rating to GCI's new unsecured notes; outlook stable

23 Sep 2020

New York, September 23, 2020 -- Moody's Investors Service ("Moody's") assigned a B3 rating to GCI, LLC's (GCI or the Company) proposed $600 million senior unsecured notes. In connection with the financing, the company is also upsizing its Senior Secured Term Loan B to $400 million. The proceeds from the new unsecured notes, the loan, as well cash on balance sheet and revolver draw, totaling approximately $825 million, will be used to fully repay $775 million in existing notes, including the 6.625%, $325 million unsecured notes (due 2024) and the 6.875%, $450 million unsecured notes (due 2025) -- "the Refinancing". All ratings, including the B2 Corporate Family Rating (CFR), B2-PD Probability of Default Rating (PDR), and all existing instrument ratings are unaffected by the financing. The outlook is stable.

Assignments:

..Issuer: GCI, LLC

....Senior Unsecured Notes, Assigned B3 (LGD5)

On August 6, GCI Liberty and Liberty Broadband Corporation (the "parties") announced[1] that they had signed an agreement for a combination (the "Merger"). In the Merger, Liberty Broadband Corporation will become GCI's Parent entity (referred to herein as "Parent"). The Merger will be executed in a stock-for-stock exchange in which the Parent will acquire all the outstanding shares of Series A common stock, Series B common stock, and Series A Cumulative Redeemable Preferred Stock of GCI Liberty. As a result of the proposed Merger, John Malone (the "largest shareholder") will have beneficial ownership of not more than approximately 49% of the Parent's aggregate outstanding voting power, with exchange rights to preserve his power for dilutive events. John Malone currently has 27.5% of the vote at GCI Liberty and 49% of the vote at Liberty Broadband Corporation. The proposed Merger will also combine the largest shareholder's two cable related investments into one, simplified holding structure. Subject to the receipt of stockholder votes, regulatory approvals and other customary conditions, the Parties anticipate that the Merger will close in 2021.

We view the Refinancing, and planned Merger, overall as credit negative to GCI. Positively, the Merger and Refinancing will substantially increase the amount of Charter stock held by GCI's Parent, generate some interest savings, and result in an extended maturity profile. However, we view it as credit negative overall since the Merger will shift the net asset value of GCI's current ownership in Liberty Broadband shares, worth approximately $5.5 billion (and the related collateralized margin loan) outside the corporate family. Additionally, the Refinancing will weaken covenant protections with elimination of the 6.5x total net leverage maintenance test in the existing credit agreement, the elimination of the $3 billion minimum net asset restricted payment test, and increases debt close to 0.5x. Upon completion of the Merger, GCI will have flexibility under its debt agreements to distribute its investments in publicly owned shares, including Charter and Lending Tree, to its Parent. We believe those investments, which have appreciated, combined with the Charter stock at Liberty Broadband Corporation will be readily available to periodically recapitalize GCI when necessary, consistent with past practice.

RATINGS RATIONALE

The credit profile is constrained by moderate governance risk. The company's largest shareholder has a history of managing assets in complex organizational structures, executing tax-free asset swaps among separately managed companies, and using a high degree of financial engineering to optimize investment returns while balancing credit risk. The location, value, mix, and accessibility of pledged and unpledged assets both within the corporate family, and outside, can vary with limited restrictions, making the permanence of the corporate structure uncertain. Additionally, while financial policy has generally been balanced, with moderate leverage (between 4x-5x), no dividends paid, and a history of equity contributions to GCI, the company's debt agreement permits higher leverage with the elimination of debt incurrence. We also view negatively, the company's small operational scale and limited geographic diversity with regional concentration in one state, which has experienced a weak economy that is highly dependent on oil markets. Strong competition, and a secular decline in pay-tv video and wireline voice, weigh on operating performance. Regulatory risks are also a constraint, with a significant percentage of revenue derived from government subsidies and regulated pricing which can result in lower revenues and delayed cash collection cycles, causing significant working capital deficits. In combination with the capital-intensive nature of the business and its interest burden, the company has been periodically dependent on equity contributions to cover its variability in cash flows which can be negative.

GCI's credit profile is supported by its significant unencumbered assets, though GCI will have the flexibility under its debt agreements to distribute these assets to its Parent upon the closing of the Merger. GCI's credit profile also benefits from potential support from its Parent, which will own shares of Charter Communications, Inc. (Charter, Ba2 stable) common stock worth close to $38 billion if the Merger is consummated. Pro forma for the planned Merger, we expect the Charter stock owned by GCI will be about 2x rated debt, and total assets (including Lending Tree) to be over 3x. We estimate Charter stock owned outside GCI, net of loans, will be approximately $30 billion or more than 20x GCI rated debt. Liberty Broadband is the largest shareholder of Charter with total fully diluted equity ownership of approximately 22.2% (24.4% pro forma for the Merger) which we believe is critically important to the reporting structure of GCI's parent. The telecommunications operating company is also the leading communications provider in Alaska delivering a quad of services with significant market share in each. Strong broadband demand drivers support stable to modest organic revenue growth, and good EBITDA margins in the mid to high 30% range. The business model has a high mix of recurring revenues from a large base of mostly small residential customers.

GCI's SGL-2 speculative grade liquidity rating reflects good liquidity supported by cash balances of near $95 million, $65 million pro forma for the transaction solid availability of at least $245 million under the $550 million revolver, ample headroom under loan covenants, and very substantial alternate liquidity in the value of unencumbered assets.

The senior secured bank credit facility (including the Term Loan B and Revolving Credit Facility) is rated Ba2 (LGD2), three notches higher than the B2 CFR. Lift is supported by substantial senior unsecured claims which represent nearly 50% of the capital structure. We rate the unsecured notes B3 (LGD5), one notch below the CFR, reflecting its junior claim relative to the senior secured bank facility. Instrument ratings incorporate a B2-PD probability of default rating and an expectation of an average recovery in bankruptcy (e.g. 50%) given the mixed capital structure, with both senior and junior claim priorities. Lease rejection claims and trade payables are insignificant to instrument ratings given their small claim sizes relative to funded debt.

A subsidiary of GCI is borrower on a $500 million committed revolving facility provided by GCI's Parent which provides approximately one notch of lift to both the secured and unsecured ratings. GCI management has confirmed that the facility will remain an obligation of a GCI subsidiary following the contemplated Merger. If the committed facility is partially reduced or fully eliminated, the instrument ratings (both secured and unsecured) could be downgraded by 1 notch assuming no other changes in the financial profile or debt structure.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

We believe telecommunication service providers generally have less exposure than many other sectors, and expect increased demand for voice, video and data during the current crisis are likely to temporarily improve operating performance metrics. As of June 30, the company was able to grow revenue generating data and wireless subscribers by 7,800 and 7,700 year to date, respectively. Video viewership and engagement are rising sharply, with subscribers spending an extraordinary amount of time watching TV for news and entertainment comfort with the complete shut-down of US cinemas. Broadband data demand has increased significantly, and usage is more evenly distributed with the sudden and very sharp rise in remote workers. Most of the US workforce (excluding essential, front-line workers) are now using their internet full-time, for voice, data, and video communications. Additionally, online commerce and remote learning are drawing significant demand for communication services. We realize there will be significant disruption to direct selling, on-premise installations and service, payments from residential and small and medium sized businesses, advertising, certain programming (sports and new production / content), and operations (component supply chains, construction / network upgrades). However, we expect any temporary negative implications will most likely to partially or fully offset by the favorable effects of the pandemic.

The stable outlook reflects our expectation that debt and annual revenues and EBITDA will average approximately $1.4 billion, $900 million, and up to $340 million, respectively over the next 12-18 months. We project EBITDA margins in the mid to high 30% range. Net of capital spending (with capex to revenue averaging near 15%, as reported) and the burden of interest expense (equal to near 4.5% of debt), we expect annual free cash flow to average at least $100 million over the next 12-18 months, depending on swings in working capital which is highly variable due to unpredictable government collection cycles. Our annual revenue growth projections assume video will, on average, fall by mid-single digit percent, wireless will be flat to up by low single-digit percent, and data will average 2%-4%. We expect the leverage ratio to be approximately 4.5x by the end of 2021, remaining inside our tolerances with good liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ratings could be upgraded if gross debt/EBITDA (Moody's adjusted) is sustained below 4.5x, free cash flow to debt (Moody's adjusted) is sustained above 7.5%, and there is not a material and unfavorable change in the value, mix, accessibility, or location of unpledged assets held inside or outside the corporate family. A positive rating action could also be considered if the Company's liquidity profile improved, there were favorable changes in regulations, scale or diversity increased, operating performance stabilized or improved, financial policy was more conservative, or governance risk moderated.

The ratings could face downward pressure if gross debt/EBITDA (Moody's adjusted) is sustained above 5.5x, free cash flow to debt (Moody's adjusted) is sustained below 2.5% or there was a material and unfavorable change in the value, mix, accessibility, or location of pledged or unpledged assets held inside or outside the corporate family. A negative rating action could also be considered if liquidity deteriorated, financial policy turned more aggressive, or parental support was considered unlikely.

GCI owns and operates interests in a broad range of communications businesses. Its principal operating asset is a leading integrated, facilities-based communications provider based in Anchorage, Alaska, offering local and long-distance voice, wireless, video, and data services to consumer and commercial customers throughout the state. GCI also holds equity interests in Charter (2%) Liberty Broadband (23%, which owns approximately 22% of Charter stock), and Lending Tree (26%). The company generated approximately $920 million in revenue for the last 12 months ended June 30, 2020.

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. 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 agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

REFERENCES/CITATIONS

[1] Merger/Acquisition agreement 06-Aug-2020

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
Client Service: 1 212 553 1653

No Related Data.
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