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Announcement:

Moody's rates Zayo's upsized notes B2; outlook stable

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 forces.

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, CO

New York
Gerald Granovsky
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Russell Solomon
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
USA

Moody's rates Zayo's upsized notes B2; outlook stable
No Related Data.
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