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Rating Action:

Moody's assigns B3 to Fusion Telecommunications International, Inc.

Global Credit Research - 14 Feb 2018

New York, February 14, 2018 -- Moody's Investors Service (Moody's) has assigned a first-time B3 corporate family rating (CFR) and a B3-PD probability of default rating (PDR) to Fusion Telecommunications International, Inc. (Fusion). Moody's has also assigned a B3 (LGD3) rating to the company's proposed $550 million senior secured first lien credit facility which consists of a $500 million 7-year term loan and a $50 million 5-year revolver. Additionally, Moody's has assigned a Caa2 (LGD6) rating to the proposed $70 million 7.5-year senior secured second lien term loan. Proceeds from the secured credit facilities will be used to repay existing debt at Birch Communications Inc. (Birch, B3 stable), which Fusion is acquiring in an all-stock transaction, as well as repay existing debt at Fusion. Upon close of the transaction, which will include the divestment of a carrier-focused business at Fusion and exclude Birch's low margin consumer-focused operations and single-line business customers, Moody's will withdraw all ratings for Birch. The ratings assigned to Fusion reflect Moody's view of the end state capital structure of Fusion following its combination with Birch. Fusion's outlook is stable.

Assignments:

..Issuer: Fusion Telecommunications International, Inc.

.... Probability of Default Rating, Assigned B3-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-2

.... Corporate Family Rating, Assigned B3

....Senior Secured 1st Lien Bank Credit Facility, Assigned B3 (LGD 3)

....Senior Secured 2nd Lien Bank Credit Facility, Assigned Caa2 (LGD 6)

Outlook Actions:

..Issuer: Fusion Telecommunications International, Inc.

....Outlook, Assigned Stable

RATINGS RATIONALE

Fusion's B3 CFR is supported by a recurring revenue model, low capital intensity, and positive free cash flow. On a standalone basis prior to its combination with Birch, Fusion's differentiated market position as a single source provider serving about 13,500 customers requiring multiple cloud solutions helped drive steady revenue growth, high ARPUs (average monthly revenue per user), and low churn. While acquisitions played a role in historical growth, Moody's expects Fusion to benefit from continued positive organic and acquisition-related growth momentum in its existing addressable markets, including upside from cross-selling and upselling cloud services solutions to portions of Birch's base of about 156,000 business customers. Fusion's end-to-end provisioning of multiple cloud voice, cloud connectivity, and cloud computing solutions on one platform simplifies its value proposition relative to single-product focused cloud services competitors. The company's credit profile is constrained by its small scale which limits the ability to absorb unexpected disruptions to its business in a challenging competitive environment. Fusion's strategy critically hinges on this business model combination proving itself over the intermediate term in sustainably reversing Birch's organic subscriber and revenue decline history. The company will initially benefit from an improved maturity profile and solid liquidity versus that of Birch on standalone basis.

Moody's believes Fusion faces strong competition in each of its operating segments. The acquired Birch business is highly concentrated in providing traditional and IP-based voice and connectivity services to small and medium-sized business (SMB) customers. While the acquired Birch business has faced difficulties reducing relatively high churn rates and delivering balanced organic growth, it has recently demonstrated success moving upmarket. In 4Q 2017 about 70% of Birch's total bookings consisted of per customer ARPUs of over $1,000, well above the company's overall ARPU range of about $220-$230. Leveraging Fusion's advanced services capabilities, the combined company aims to better sell next-generation solutions, such as unified communications as a service (UCaaS), to Birch's SMB customers. While there is positive momentum in the UCaaS market, there is also growing competition due to low barriers to entry. Large scale cloud providers and incumbent carriers, due to their clear scale and cost advantages, could develop or enhance existing competing applications and disrupt markets for smaller players like Fusion.

Over the next several years, as more applications become cloud-based and more companies pursue cloud-based information technology strategies, Fusion's focus on cloud connectivity provisioning will support continued revenue growth opportunities. Fusion will face tough competition in this market, much as it does in the cloud communications market. As a smaller player, the company can mitigate some of its competitive disadvantage through differentiation of its service proposition, offering better customer care, customization and rapid service provisioning versus what larger peers can accommodate.

Moody's expects Fusion to have good liquidity over the next 12 months and expects the company to have approximately $44 million of cash on the balance sheet and an undrawn $50 million revolving credit facility following the close of the transaction. The first lien term loan, second lien term loan, and the revolver will contain a total net leverage ratio and a maximum capex covenant, which Moody's expects to be set with ample cushion in the new credit agreement. Fusion has limited tangible assets that could be monetized for alternate liquidity and its few hard assets are encumbered by the secured bank facilities.

The ratings for debt instruments reflect both the probability of default of Fusion, to which Moody's assigns a PDR of B3-PD, and individual loss given default (LGD) assessments. The senior secured first lien credit facilities are rated B3 (LGD3), in line with the CFR given the moderate loss absorption provided by the Caa2 (LGD6) rated second lien facility and a smaller, unsecured subordinated note unrated by Moody's.

The stable outlook reflects Moody's view that Fusion will successfully execute its strategy of forging new and profitable sales growth with the cross-selling and upselling of its integrated cloud solutions to Birch's legacy business customers. In addition to revenue growth, we expect the company to recognize material cost synergies from the business combination which should result in margin expansion, pushing leverage below 4.5x (Moody's adjusted) by year end 2018.

Moody's could upgrade Fusion's ratings if debt/EBITDA (Moody's adjusted) trends towards 3.5x and the company produces consistent, positive free cash flow. Moody's would likely downgrade Fusion's ratings if revenue and EBITDA decline such that leverage exceeds 5.5x on a sustained basis. Additionally, insufficient or inconsistent progress on churn reduction and organic revenue stabilization, failure to successfully integrate acquired businesses, or evidence of liquidity pressure could lead to a downgrade in ratings.

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Neil Mack, CFA
Vice President - Senior Analyst
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

John Diaz
MD - Corporate Finance
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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