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Rating Action:

Moody's downgrades GTT's senior secured bank credit facilities to B2 from B1

26 Apr 2018

New York, April 26, 2018 -- Moody's Investors Service ("Moody's") has downgraded GTT Communications, Inc.'s ("GTT") senior secured bank credit facility rating to B2 (LGD3) from B1 (LGD3) following a change in deal structure. GTT has decided to increase the amount of bank debt used to fund its acquisition of Interoute Communications Holdings SA ("Interoute") by approximately $575 million. With the upsized term loan, the company will no longer issue $575 million of high yield notes. The decision to have a capital structure with a smaller pool of unsecured debt to provide support to the senior secured creditors results in a one notch downgrade of the secured debt rating. Further, we believe the base of tangible assets used to secure the bank loans may be insufficient to cover this materially larger amount of secured debt outstanding in a distressed scenario. All other ratings, including the company's B2 corporate family rating (CFR), B2-PD probability of default rating (PDR), Caa1 (LGD6) unsecured, SGL-2 speculative grade liquidity rating, and stable outlook, are unchanged.

Downgrades:

..Issuer: GTT Communications BV

....Senior Secured Bank Credit Facility, Downgraded to B2 (LGD3) from B1(LGD3)

..Issuer: GTT Communications, Inc.

....Senior Secured Bank Credit Facilities, Downgraded to B2 (LGD3) from B1 (LGD3)

Outlook Actions:

..Issuer: GTT Communications, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

GTT, pro forma for the Interoute acquisition, benefits from an improved scale and market position which is expected to increase revenue growth potential within its target market of international network services. Enhanced geographic diversity and a high degree of recurring revenue partially offset elevated credit risk following the transaction. While the company's low capital spending and improving margin profile result in positive free cash flow, cash generation is pressured due to cash outflows related to continuous acquisition activity and related integration costs. Given the size of Interoute, integration will take approximately one year, or about twice as long as GTT's typical integration process. GTT will also continue to grow through tuck-in acquisitions simultaneously with the major integration of Interoute. This consistently high acquisition pace strains cash flow and taxes management resources, which could negatively impact GTT's strategic focus and organic growth.

GTT is challenged by its small scale and low asset coverage relative to its debt load. The company has mitigated some of these risks via its purchase of Interoute and Hibernia before it, both of which benefit from owned fiber assets. However, we believe the assets acquired in the Interoute transaction are more commodity-like and have less market value than last mile fiber connections. GTT has demonstrated consistent success to date making relatively small, frequent, and quickly credit accretive acquisitions. However, this strategy has contributed to sustained high leverage. GTT's ability to successfully integrate a larger acquisition will likely be difficult, and will magnify the operational stresses associated with its persistent and aggressively debt-funded acquisition strategy. Further, frequent use of M&A signals reliance on the markets to fund growth that reduces visibility into the rate of organic growth.

GTT's business model employs an architecture with mostly leased infrastructure that results in low capital intensity but could expose the company to margin pressure if end-user pricing and network leasing cost trends diverge over time. Given this low capital intensity strategy, Moody's believes GTT currently has lower leverage tolerance than facilities-based carriers.

Moody's expects GTT to have good liquidity over the next 12 months and expects the company to have approximately $90 million of cash on the balance sheet and an undrawn $200 million revolving credit facility following the close of the transaction. Moody's expects GTT to draw on the credit facility opportunistically to fund small, tuck-in acquisitions. The company's revolver is subject to a maximum consolidated net secured leverage ratio, springing when usage of the facility exceeds 30%. We expect GTT will maintain ample cushion on the maximum senior secured leverage covenant should the covenant be tested.

GTT's stable outlook reflects the expectation of a successful integration of the Interoute business and realization of significant synergies within 12 months after deal close. We expect the company to maintain positive free cash flow and for GTT's leverage to trend towards 5.5x (Moody's adjusted) through 2019 and return within the range of B2 rating in 2020.

The B2 rating could be upgraded if leverage falls below 4.5x (Moody's adjusted) and free cash flow to debt exceeds 10%. The rating could be downgraded if liquidity becomes strained, if free cash flow is negative, if leverage is not on track to decline towards 5.5x (Moody's adjusted), or if there are problems during the integration of Interoute.

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.

Based in McLean, VA, GTT is a multinational Tier 1 internet service provider offering wide area networking, internet, managed services and voice services. The company operates a top five ranked global IP (internet protocol) backbone with over 300 points-of-presence which connects enterprise and carrier clients to any location in the world and any application in the cloud. The company generated $828 million in revenue in 2017.

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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