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Rating Action:

Moody's upgrades Primus Telecommunications' debt to B3

11 Feb 2011

New York, February 11, 2011 -- Moody's Investors Service ("Moody's") upgraded Primus Telecommunications Group, Incorporated's ("Primus" or the "company") Corporate Family Rating ("CFR") to B3 from Caa1, due to the company's improved leverage metrics, free cash flow generation and Moody's view that the company will make further progress in streamlining its business segments. As part of the rating action, Moody's has assigned provisional (P)B3 (LGD4-63%) ratings to the company's proposed 9.5% senior secured notes due 2019. The new notes are offered in an exchange for the company's existing $130 million 13% senior secured notes due 2016, and $114 million 14.25% senior subordinated notes due 2013. Moody's notes that the maximum amount of new notes offered will not be sufficient to exchange all of the outstanding debt, with about $24 million of legacy debt to remain outstanding following the exchange. Moody's believes that the company will seek to exchange all of the 13% notes and leave a portion of the 14.25% senior subordinated notes outstanding, as they are redeemable at par at any time. Moody's expects Primus to redeem the remaining 14.25% notes sometime in 2011 with cash on hand. At the conclusion of the exchange offering, Moody's will assign definitive ratings to the new instruments, and the ratings under the company's existing notes that have been fully exchanged will be withdrawn.

The company's Speculative Grade Liquidity Rating remains SGL-3 based on the rating agency's expectation of Primus's deemed "adequate" liquidity position over the next twelve months, and the rating outlook remains stable.

..Issuer: Primus Telecommunications Group, Inc.

Upgrades:

....Corporate Family Rating, Upgraded to B3 from Caa1

....Probability of Default Rating, Upgraded to B2 from B3

Assignments:

....$240 million Senior Secured Notes Due 2019, (P) B3 (LGD4-63%), Provisional

Outlook is Stable

RATINGS RATIONALE

Primus' B3 CFR primarily reflects the significant continuing execution risk from the company's ongoing restructuring, sustainability of the company's business model amid the significant competitive and technological challenges inherent to the telecommunications industry and the uncertainty of whether revenues from its growth services will rise faster than the revenue declines in its still significant legacy voice and long distance businesses, which have been declining materially over the past four years.

Supporting the rating is the relatively moderate financial leverage Primus carries following its bankruptcy restructuring in 2009, which Moody's estimates was about 3.6 times adjusted debt/EBITDA (including Moody's standard adjustments for pensions and operating leases) at year end 2010. Moody's projects adjusted leverage to decline further to below 3.0x by the end of 2012. In addition, the proposed debt exchange will further stabilize the company's capital structure. Over the past two years, Primus has been free cash flow positive, helped by the reduced interest expense from the reduced debt and cost containment.

In addition to reducing debt, Primus has been streamlining its business model by divesting lower performing segments (such as retail operations in Europe). The company is also making progress in repositioning its growth around facilities-based Voice-over-Internet-Protocol and high speed DSL offerings to small and medium sized businesses and the residential markets, primarily in Australia and Canada, along with growing sales around its fiber network in Australia. Primus' Wholesale business currently generates about 25% of its revenues, before the acquisition of Arbinet. Although wholesale is a low margin business, the increased scale should allow the company to generate incremental cash flow through anticipated cost savings of about $6 million, when fully realized

While Primus' credit profile has shown improvement through these efforts, Moody's believes the company plans to increase capital expenditures to focus on the growth businesses, which may put some pressure on free cash flow. The company generates the lowest EBITDA margins among the competitive telecom carriers that Moody's rates. This necessitates that Primus be extremely vigilant in maintaining a low cost structure, which may limit the company's ability to grow if it needs to add capacity to its network or devote greater spending to marketing and promotional activity.

The SGL-3 liquidity rating reflects Moody's view that pro-forma for the $240 million exchange offering, Primus will have adequate liquidity over the next four quarters characterized by good cash balances and modest free cash flow generation. Notably, the company does not have an external revolving credit facility as an additional source of cash. Over the 4-quarter horizon to December 31, 2011 Primus' main source of liquidity is expected to be cash on hand, which Moody's expects to be over $40 million at year end 2010 and operating cash flows, which pro-forma for FYE 2010 are approximately $60 million per year. Against this, Primus' main use of cash will be its likely cash burn of roughly 4% to 5% of sales, to support reinvestment in the company's growth businesses and the potential takeout of the remaining 14.25% notes.

What Could Change the Rating - Up

Upward rating pressure could build if the Company is successful in restoring its growth trajectory over its facilities-based network, such that its adjusted EBITDA margins approach 20%, adjusted Debt/EBITDA leverage is maintained below 3.0x and free cash flow approaches 10% of debt.

What Could Change the Rating - Down

Moody's will likely lower Primus's corporate family rating if the company is unable to deliver revenue and EBITDA growth or if its growth plans consume more cash resources than envisioned, its adjusted Debt/EBITDA leverage does not fall below 3.5x and free cash flow burn persists. The rating could also come under pressure if increasing competition or regulatory changes result in declines in EBITDA.

Moody's most recent rating action on Primus was on December 1, 2009 when the rating agency assigned ratings to the company's 13% Canadian and US notes.

The principal methodologies used in this rating were Moody's Global Telecommunications Industry published in December 2010 and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Primus is a competitive telecom provider headquartered in McLean, VA. The company offers telecommunications, IP and data center services to small and medium-sized enterprises, residential customers and other telecommunications carriers and resellers in the United States, Canada, Australia, and Brazil.

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 information, and 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 maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

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

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Primus Telecommunications' debt to B3
No Related Data.
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