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Rating Action:

Moody's confirms Zayo's B2 CFR; outlook stable

28 Feb 2019

New York, February 28, 2019 -- Moody's Investors Service (Moody's) confirmed the B2 corporate family rating (CFR) and the B2-PD probability of default rating (PDR) of Zayo Group, LLC (Zayo). Moody's also confirmed the company's Ba2 senior secured ratings and the B3 senior unsecured ratings. Zayo's speculative grade liquidity (SGL) rating remains unchanged at SGL-2. This concludes the review that was initiated on November 8, 2018 when Zayo announced its plans to separate into two publicly-traded companies. The outlook is stable.

The confirmation of the ratings reflects Zayo's decision to terminate its previously contemplated plans and to remain a single company with redesigned segments to simplify execution and optimize value over time. Zayo's main focus will center on its newly formed Network segment, created mainly from its existing Fiber Solutions, Transport and Enterprise segments. The company's cloud infrastructure business will be contributed to its zColo segment, potentially facilitating a future sale or monetization of these data center assets. The company's Alllstream segment, to which the company will contribute a modest amount of Enterprise Networks revenue, will be targeted for monetization in some form as well. The confirmation also reflects Moody's belief that Zayo will maintain leverage (Moody's adjusted) between 5x to 6x and sustainably generate free cash flow in line with the B2 CFR.

Confirmations:

..Issuer: Zayo Group, LLC

.... Corporate Family Rating, Confirmed at B2

.... Probability of Default Rating, Confirmed at B2-PD

....Senior Secured Bank Credit Facility, Confirmed at Ba2 (LGD2)

....Senior Unsecured Regular Bond/Debenture, Confirmed at B3 (LGD5)

Unchanged:

..Issuer: Zayo Group, LLC

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

Outlook Actions:

..Issuer: Zayo Group, LLC

....Outlook, Changed To Stable From Rating Under Review

RATINGS RATIONALE

Zayo's B2 CFR reflects its stable base of contracted recurring revenue and valuable fiber optic network assets. The company has a strong competitive position due to its extensive network reach which spans North America and Europe. We expect Zayo to continue to benefit from positive secular trends, specifically strong bandwidth demand from both carrier and enterprise customers and densification of wireless networks. The company's credit profile is pressured by weak revenue growth, heavy capital investment requirements and a relatively high churn rate, both of which depress free cash flow generation. Improved capital efficiency has helped offset negative pressure from high churn.

Zayo has maintained high leverage of 5x to 6x (Moody's adjusted debt to EBITDA) and generally uses debt to finance acquisitions. In addition to increasing its credit risk, Zayo's serial debt-financed acquisition activity has also led to poor visibility into the company's organic growth and steady state cost structure. The company has discussed plans to convert to a Real Estate Investment Trust (REIT), which we would view as a negative credit event if it resulted in high dividends and negative free cash flow.

The stable outlook reflects our view that Zayo will continue its EBITDA growth such that leverage trends lower and free cash flow remains positive.

Moody's could upgrade Zayo's ratings if adjusted leverage approaches 4.5x and FCF/Debt is sustained around 10%. Moody's could downgrade Zayo's ratings if liquidity deteriorates or if capital intensity increases such that Zayo is unable to generate sustainable positive free cash flow or if leverage exceeds 6x on a sustained basis.

The principal methodology used in these ratings was Communications Infrastructure Industry published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Boulder, Colorado, Zayo Group, LLC is a provider of bandwidth infrastructure and network-neutral interconnection services with significant fiber network assets and international reach. The company emphasizes its communications infrastructure business which is divided into four key segments along with other revenues. Zayo also operates a noncore business segment, Allstream.

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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