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Rating Action:

Moody's assigns Caa1 CFR to Fusion Connect; stable outlook

13 Feb 2020

New York, February 13, 2020 -- Moody's Investors Service, ("Moody's") has today assigned a Caa1 Corporate Family Rating (CFR) and a Caa1-PD Probability of Default Rating (PDR) to Fusion Connect, Inc (Fusion). Concurrently Moody's assigned a B1 rating to the company's new $115 million super senior secured term loan and a Caa2 rating to the company's $225 senior secured term loan. The outlook is stable.

Fusion emerged from Chapter 11 bankruptcy protection on 14 January 2020 after the company had filed for bankruptcy back in June 2019.

Assignments:

..Issuer: Fusion Connect, Inc.

.... Probability of Default Rating, Assigned Caa1-PD

.... Corporate Family Rating, Assigned Caa1

.... Super Senior Secured Term Loan, Assigned B1 (LGD2)

....Senior Secured 1st Lien Term Loan, Assigned Caa2 (LGD4)

Outlook Actions:

..Issuer: Fusion Connect, Inc.

....Outlook, Assigned Stable

RATINGS RATIONALE

Fusion's Caa1 rating reflects expectations of sustained and substantial revenue decline over the coming years as new bookings fail to offset high churn in the company's legacy voice businesses which have been in a prolonged structural decline. The Caa1 rating also reflects our expectations that earnings declines combined with around $20 million of annual debt increases due to the PIK nature of the senior secured term loan will lead to increasing gross leverage such that Moody's adjusted debt to EBITDA will remain above 4x for the foreseeable future.

The Caa1 rating also reflects Fusion's strong revenue diversification, with the company's top 25 clients representing only 10% of revenue. The rating also reflects Fusion's adequate liquidity profile -- at closing of the refinancing transaction, Fusion holds around $50 million in cash on hand and generates low but positive free cash flow.

Fusion emerged from bankruptcy with a much reduced debt burden having shed almost 56% of its previous balance sheet debt. This reduction in debt quantum, along with the PIK interest on the senior secured term loan, allows the company to save material cash interest cost and divert these funds to investing in growing its Hosted business. In particular, UCaaS (Unified Communications as a Service) and other Hosted Voice and Access businesses currently make up less than half of the current business based on revenue but offer growth opportunities.

Fusion's legacy services are in secular decline so the company could decide to divest some of these assets. As such, Fusion's business model as well as its ultimate capital structure could change materially in the future.

Fusion has an adequate liquidity profile supported mostly by the $50 million of cash the company holds on balance sheet. While Fusion is expected to generate free cash flow, this is inflated by the company paying a material portion of its interest in PIK. The company does not have a revolver and will have to comply with quarterly maintenance covenants for leverage, minimum LTM EBITDA and maximum LTM capex. At closing of the refinancing transaction the company had around 20% headroom under the leverage covenant.

The stable outlook reflects Moody's expectations that the revenue decline will remain overall manageable at high single digit in the long term and mitigated by an improvement in margins and lower debt through scheduled repayments. The stable outlook also reflects Moody's expectations that Fusion will retain adequate liquidity.

The B1 on the super senior secured term loan reflects its priority first lien ranking, ahead of the Caa2 rated senior secured loan which has a second lien on the pledged assets. The instrument ratings reflect the probability of default of the company, as reflected in the Caa1-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' rankings in the capital structure.

What could change the rating - UP

Given Fusion's business is likely to go through further transformation an upgrade to the ratings is unlikely in the short term. Over the medium term, the ratings could be upgraded if revenues and profitability stabilize, sustained positive free cash flow is expected, and the capital structure is considered sustainable.

What could change the rating -- DOWN

The ratings could be downgraded should the pace of revenue decline accelerate or should free cash flow generation deteriorate.

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, 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.

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.

Christian Azzi
VP-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

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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