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Announcement:

Moody's say's TPx's ratings unchanged following sale and leaseback transaction

06 Mar 2018

New York, March 06, 2018 -- Moody's Investors Service (Moody's) says that B3 corporate family rating (CFR) of TPx Communications (TPx) is unchanged following the anticipated sale and leaseback transaction with Uniti Group Inc. (Uniti, B3 negative). TPx will sell and leaseback from Uniti approximately 650 route miles of fiber network assets for $95 million in cash. The triple-net lease has an initial term of 15 years and an option to extend the lease for an additional 25 years. Moody's expects TPx to use the proceeds of the asset sale to pay down debt as well as invest in its managed services business. Network asset ownership is less important to TPx's strategy now that it has shifted focus towards managed services and away from its legacy telecommunication operations. Despite ownership being of less strategic importance, weaker asset coverage could diminish recovery rates on the secured bank facilities in a distressed scenario. However, Moody's believes TPx's business evolution and investment in managed services better supports the company's long term stability. Services such as unified communication as a service (UCaaS) and other cloud services are experiencing strong secular growth. TPx's long-term revenue and EBITDA growth will be driven by its ability to grow its managed services business in a competitive and fragmented end market.

Moody's believes this transaction will raise TPx's debt/EBITDA leverage (Moody's adjusted) in the near term. In accordance with its standard financial statement adjustments, Moody's will capitalize the new operating lease and add the present value of minimum lease commitments to TPx's balance sheet as debt. While Moody's views the present value of the lease as approximately equivalent to the $95 million of sale proceeds, we believe this transaction will slightly increase TPx's overall amount of adjusted debt because we do not expect that all of the proceeds will be used for debt repayment. However, prudent investment in the business could eventually offset this incremental leverage from improved EBITDA growth.

TPx's B3 CFR reflects its low margins, modest free cash flow and the intense competitive pressure the company faces within its core legacy markets. TPx faces tough competition from incumbent carriers and cable companies who operate more ubiquitous physical networks and offer broader service capabilities including cloud and managed services. With its fairly recent acquisition of DSCI Corporation, TPx expanded its managed services offerings, including managed IT (information technology) and UCaaS offerings, including over-the-top solutions which effectively expand its addressable market. With high growth potential, managed services are poised to offset declines in the company's legacy CLEC (competitive local exchange carrier) business and contribute to better overall margins. The company's potential to increasingly deliver higher margins and growing cash flows going forward is driven by the successful evolution of its asset-light business mode, and its acquisition and development of alternative, lower cost network access assets.

Moody's could upgrade TPx's ratings if debt/EBITDA (Moody's adjusted) trends towards 4x and the company produces consistent, positive free cash flow. Moody's would likely downgrade TPx's ratings if revenue and EBITDA decline such that debt/EBITDA (Moody's adjusted) exceeds 6x on a sustained basis. Additionally, evidence of liquidity pressure or the failure to successfully integrate acquired businesses could lead to downgraded ratings.

TPx is a national managed service provider and a competitive local exchange carrier serving medium-sized business customers in markets across California, Nevada, Texas and New England. During the last 12 months ended September 30, 2017, TPx generated $677 million in revenue.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

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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