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Global Credit Research - 06 Jan 2011
Approximately $175 million of rated debt affected
New York, January 06, 2011 -- Moody's Investors Service has assigned a Ba3 rating to Dycom Investments,
Inc.'s (Dycom Investments) proposed $175 million,
ten year senior subordinated notes. Concurrently, the outlook
was changed from negative to stable based on Dycom's ability to effectively
control costs, maintain very good liquidity and opportunity to capitalize
on positive trends in wireless backhaul and expansion of broadband in
rural areas of the U.S. All ratings, including the
Ba2 corporate family rating, have been affirmed. Dycom maintains
a speculative grade liquidty rating of SGL-1 characterized by healthy
cash balances, expectation of positive cash from operations over
the next twelve months, and no near-term debt maturities.
Dycom Investments, Inc.
Proposed $175 million senior subordinated notes due 2021,
Ba3 (LGD-5, 75%)
Dycom Industries Inc.
Corporate family rating at Ba2
Probability of default rating at Ba2
SGL-1 Speculative Grade Liquidity
Outlook changed to stable
Existing senior subordinated notes due 2015, Ba3 (LGD-5,
* The Ba3 rating on Dycom's existing senior subordinated notes will
remain LGD-5, 78% pending their planned redemption.
These ratings have been assigned subject to Moody's review of final documentation
following completion of the notes offering. Assuming substantially
all of the notes are redeemed, the instrument rating will be withdrawn.
For additional information, please refer to the Credit Opinion to
be posted on moodys.com.
The change in rating outlook reflects Moody's expectation of continued
improvements in profitability as demonstrated by signs of year-over-year
revenue growth, increased capital spending by some of Dycom's
top telecommunications customers combined with an expectation that the
company's operating results would benefit from an improvement in
overall domestic economic conditions. Further, the change
in outlook anticipates that Dycom will maintain its strong liquidity and
low leverage while investing its free cash flow prudently among acquisitions
and share repurchases. The stable outlook anticipates modest revenue
growth in fiscal 2011 and fiscal 2012. The stability of the outlook
is sensitive to the telecommunications and cable industry cycles,
the company's success at renewing its many master service agreements and
the continuation of positive end-market trends, including
increased outsourcing by the major providers and carriers and the consumers'
need for greater bandwidth.
Proceeds from the issuance of the proposed subordinated notes are expected
to be used in part to repurchase the existing $135 million of senior
subordinated notes with the majority of the remaining proceeds expected
to be used for working capital and general corporate purposes.
Moody's expects that the notes will be issued on a subordinated basis
and will be guaranteed by Dycom Industries, Inc. (Dycom),
the parent company, as well as all downstream domestic subsidiaries
on a senior unsecured subordinated basis. The notes are expected
to be sold according to Rule 144A. The notes also may be offered
and sold in offshore transactions in reliance on Regulation S.
The Ba2 corporate family rating balances low financial leverage,
ability to control direct expenses, and a strong liquidity profile
against economically sensitive demand, a competitive industry and
a relatively high re-investment requirement. Capital expenditure
budgets of major telecommunications and cable television providers,
which are subject to both seasonality and cyclicality, drive Dycom's
revenues. Increased outsourcing by the major broadband carriers
and consumers' need for greater bandwidth bode well for long-term
demand prospects. As a specialized construction business exposed
to long-term demand trends for telecommunication network maintenance
and expansion spending, the Ba2 corporate family rating encompasses
some tolerance for cyclicality.
However, Dycom's return measures and EBIT-to-interest
ratio presently remain weak for the rating category. On a pro forma
basis at October 30, 2010 using Moody's standard adjustments,
debt/EBITDA is in the mid-2 times range and EBITA/interest is in
the 1.5 times range. Financial leverage remains low enough
that a pick-up in revenue and earnings would translate into return
and coverage metrics more on par with the Ba2 corporate family rating.
The rating agency expects continued strong cash from operations over the
next few years.
A ratings increase is considered unlikely at this time given the highly
cyclical nature of the end-markets the company operates in,
the company's revenue scale as well as Dycom's acquisition strategy.
Positive rating momentum would likely be accompanied by expectation of
strong, sustained revenue growth as well as the achievement and
maintenance of the following credit metrics: debt/EBITDA below 1.5x,
EBITA/interest coverage of 3.5 times and return on assets of approximately
8% or greater.
Large debt financed acquisitions or excessive share repurchases that diminish
the company's liquidity profile or raise leverage could have adverse rating
implications. Despite low leverage, Dycom's total return
measures and its EBITA/interest ratio are presently weak for the rating
and, if sustained, would drive a rating downgrade.
Any deceleration in revenue trends, loss of a key customer and an
expectation that the EBITA/interest ratio will remain below 2.0
times for a prolonged period could have adverse rating implications as
would debt/EBITDA levels exceeding and sustained above 3.0 times
The principal methodologies used in this rating were Global Construction
Methodology published in November 2010, and Loss Given Default for
Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
Dycom Industries, Inc., located in Palm Beach Gardens,
Florida, is a leading provider of specialty contracting services
in North America. Dycom provides engineering, construction
and maintenance services that assist telecommunication and cable television
providers expand and monitor their network infrastructure in a cost effective
manner. To a lesser extent, Dycom provides underground locating
services for telephone, cable, power, gas, water,
and sewer utilities. Dycom generated contract revenues of $991
million for the twelve months ended October 30, 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and
confidential and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
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.
Corporate Finance Group
Moody's Investors Service
Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Ba3 rating to Dycom's proposed $175 million sub notes; outlook to stable from negative
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New York, NY 10007
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