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
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.
....Corporate Family Rating, Upgraded
to B3 from Caa1
....Probability of Default Rating, Upgraded
to B2 from B3
....$240 million Senior Secured Notes
Due 2019, (P) B3 (LGD4-63%), Provisional
Outlook is Stable
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
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
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.
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
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on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
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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 upgrades Primus Telecommunications' debt to B3
250 Greenwich Street
New York, NY 10007