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Global Credit Research - 13 Sep 2010
New York, September 13, 2010 -- Moody's Investors Service assigned a B2 (LGD3-49%) rating
to the $100 million upsize of Zayo Group, LLC's ("Zayo")
existing $250 million senior secured notes. The company
plans to use the incremental borrowings to fund a portion of the acquisition
of American Fiber Systems, which it agreed to buy for about $118
million, and to repay the revolver outstandings that were used to
fund the recently closed acquisition of Atlanta Gas & Light fiber
assets. The balance of the acquisition will be funded through cash
on hand and about $40 million in new equity contributions.
In addition, the company also has a $75 million senior secured
revolving credit facility, which Moody's does not rate. The
company will also seek to upsize the revolver by $25 million to
give it additional liquidity capacity.
As part of the rating action, Moody's affirmed Zayo's
B2 corporate family rating and B2 probability of default rating.
The rating outlook is stable.
Zayo's B2 corporate family rating reflects the company's deep fiber network
in its markets that have helped drive strong revenue growth in a difficult
operating and liquidity-strapped environment for traditional competitive
telecommunications carriers ("CLEC"). The company has delivered
quarter-over-quarter revenue growth since 2007, at
a time when many CLECs were witnessing revenue declines. In Moody's
view, the resurging demand for the company's wholesale and enterprise
bandwidth services and the stability of the recurring revenue stream from
the company's colocation business supports the rating. However,
the large number of acquisitions that have primarily been funded with
debt have increased the company's leverage levels. Proforma
for the recent acquisition of AGL Networks for about $72 million,
and the pending purchase of American Fiber Systems for about $116
million, Moody's adjusted Debt/EBITDA leverage would be about
4.6x, as of 6/30/10. As such, Moody's is concerned
about Zayo's ability to quickly delever and generate free cash flow
in light of the company's need to continue investing in new fiber
builds and network augmentations. Moody's expects the company to
incur negative free cash flow over the next several years due to ongoing
expansion capital expenditures.
In addition, ratings are tempered by high customer concentration
and small scale in a highly competitive environment. A large portion
of the company's footprint is in the northeastern USA, which is
the most competitive telecommunications market in the country, while
the company's Midwest operations may be impacted by regional macroeconomic
The stable outlook is based on Moody's view that the company has weathered
the worst of the macroeconomic pressures in its markets, and,
with adequate liquidity to fund growth, should be able to capitalize
on favorable near-term wholesale bandwidth capacity trends.
Moody's believes that the company has very good liquidity, as cash
on-hand from the new financing, coupled with full access
to its $75 million revolver (which is expected to be increased
to $100 million), are expected to cover the expected negative
free cash flow over the next four quarters.
Moody's most recent rating action on Zayo was on March 1,
2010 when the rating agency assigned first time B2 ratings to the company's
notes and corporate family.
The principal methodology used in rating Zayo Group was Moody's Global
Telecommunications Industry Methodology, published in December 2007
and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Additional research and commentary is available to subscribers at www.Moodys.com
Zayo Group is a US-based broadband infrastructure and collocation
provider. The company's headquarters are located in Louisville,
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates Zayo's upsized notes B2; outlook stable
250 Greenwich Street
New York, NY 10007
No Related Data.
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