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Rating Action:

Moody's rates Global Tel*Link's first lien B1, second lien Caa1, outlook negative

13 Oct 2010

Approximately $595 million of rated debt securities affected

New York, October 13, 2010 -- Moody's Investors Service affirmed the B2 Corporate Family Rating (CFR) for Global Tel*Link Corporation (GTL) and assigned a B1 rating to its proposed $435 million first lien senior secured credit facilities and a Caa1 rating to its proposed $160 million second lien senior secured term loan. Moody's also changed the ratings outlook to negative from stable, incorporating reduced financial flexibility pro forma for the transaction.

GTL intends to use the proceeds primarily to refinance its existing credit facilities, fund a shareholder return to its equity sponsors, and finance a strategic acquisition. The proposed transaction increases debt by approximately $250 million and weakens the credit profile, although the acquisition also increases scale and enhances GTL's competitive position, in Moody's opinion. Moody's estimates pro forma leverage will rise to the mid 5 times debt-to-EBITDA range from the high 3 times range, high for the B2 CFR, although we anticipate some improvement as GTL integrates acquired businesses and achieves synergies. Furthermore, we anticipate positive free cash flow even with the increase in interest expense.

The ratings are as follows:

Global Tel*Link Corporation

Corporate Family Rating, Affirmed, B2

Probability of Default Rating, Affirmed, B2

Existing First Lien Senior Secured Credit Facilities, B1 LGD3 37%, to be withdrawn

$20 million First Lien Senior Secured Revolving Credit Facility due 2015, Assigned, B1 LGD3 37%

$45 million First Lien Senior Secured Letter of Credit Facility due 2016, Assigned, B1 LGD3 37%

$370 million First Lien Senior Secured Term Loan due 2016, Assigned, B1 LGD3 37%

$160 million Second Lien Senior Secured Term Loan due 2017, Assigned, Caa1 LGD5 88%

Rating Outlook, Revised to Negative from Stable

RATINGS RATIONALE

The B2 CFR continues to reflect GTL's lack of scale and narrow business focus, as well as high leverage, which resulted primarily from shareholder returns. The company's low operating margins suggest an intense competitive environment, unlikely to change materially, although continued industry consolidation could ease conditions somewhat over time. Strong market share within the correctional telecommunications industry, GTL's track record of successful integration of acquisitions, high retention rates, some revenue visibility from long-term contracts, and good liquidity support the rating.

The negative outlook reflects concerns over the reduced financial flexibility to deal with possible challenges such as continued reduction in call volume, the potential for a negative impact on GTL's business from budgetary pressures on states, or the unexpected loss of a major contract.

Moody's would consider a downgrade based on expectations for negative free cash flow, lack of progress on reducing leverage to below 5 times debt-to-EBITDA, a deterioration of liquidity, or incremental shareholder returns. An adverse change in the regulatory environment or evidence that soft economic conditions are limiting end customers' willingness or ability to pay for GTL's phone services could also negatively impact the rating. Given management's track record of successful integration of acquisitions, another acquisition would not necessarily result in a negative rating action.

Moody's would consider revising the outlook to stable based on expectations for leverage to decline to below 5 times and free cash flow in the mid single digit range as a percentage of debt. An upgrade is extremely unlikely given the weak positioning of the B2 CFR and expectations that shareholder returns will resume over time. The narrow business focus also limits upward momentum. However, we could consider a positive outlook or upgrade with expectations for sustainable leverage below 3 times debt-to-EBITDA and free cash flow exceeding 10% of debt.

Moody's most recent action on GTL occurred on February 9, 2010. At that time, Moody's assigned a B1 rating to GTL's first lien secured credit facility.

The principal methodologies used in rating Global Tel*Link Corporation were Global Telecommunications Industry published in December 2007, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Based in Mobile, Alabama, Global Tel*Link Corporation provides telecommunications services to correctional facilities. GTL acquired the former MCI corrections division from Verizon in July 2007; Digital Solutions, Inc. (DSI) in June 2010; and announced plans to acquire Public Communications Services, Inc. (PCS) in October 2010. Pro forma for these acquisitions, GTL will serve almost 2 thousand facilities and over 1 million inmates in 46 states, and have annual revenue of slightly over $500 million.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, 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 assigning a credit rating.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

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New York
Karen Berckmann
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's rates Global Tel*Link's first lien B1, second lien Caa1, outlook negative
No Related Data.
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