TEXT - S&P revises GCI Inc outlook to negative

Fri Nov 16, 2012 2:14pm EST

Overview
     -- Anchorage-based diversified telecommunications provider GCI Inc.'s 
adjusted leverage could rise to over 5x by the end of 2013 from about 4.6x as 
of Sept. 30, 2012.
     -- We are revising our outlook to negative from stable and affirming our 
'BB-' corporate credit rating on the company.
     -- At the same time, we are lowering the issue-level rating on GCI's 
senior unsecured debt to 'B+' from 'BB-'.
     -- The negative outlook is based on our view that we could lower the 
ratings if GCI experiences execution missteps at the wireless partnership or 
if revenue and EBITDA decline in other segments such that leverage rises above 
5x on a sustained basis.


Rating Action
On Nov. 16, 2012, Standard & Poor's Ratings Services revised its outlook on 
Anchorage-based diversified telecommunications provider GCI Inc. to negative 
from stable. At the same time, we affirmed the 'BB-' corporate credit rating 
and most other ratings on the company. 

In addition, we are lowering the issue-level rating on GCI's senior unsecured 
debt to 'B+' from 'BB-' and revising the recovery rating to '5', which 
indicates expectations for modest (10% to 30%) recovery in the event of 
payment default, from '4', which represented expectations for average (30% to 
50%) recovery. We revised the recovery rating based on our expectation that 
GCI will raise at least $100 million of incremental senior secured debt to 
fund its payment to Alaska Communications Systems Group (ACS) as part of their 
joint venture wireless agreement, which will dilute recovery prospects for 
senior unsecured debt holders. 

Rationale
The outlook revision reflects the possibility that adjusted leverage could 
rise to over 5x by the end of 2013 from about 4.6x as of Sept. 30, 2012. This 
could prompt us to revise out assessment of GCI's financial risk profile to 
"highly leveraged," from the current ""aggressive," which could result in a 
downgrade. Our adjusted leverage calculation includes the EBITDA from GCI's 
businesses outside of the proposed wireless joint venture with ACS as well as 
the EBITDA contribution from the wireless partnership less the preferential 
cash distribution to ACS, which will be about $50 million per year for the 
first two years of operations and $45 million in the next two years, subject 
to certain penalties based on customer losses. 

The negative outlook also incorporates the added risk that the joint venture 
partnership contributes in terms of GCI's future cash flow generation, based 
on our expectation for declining roaming revenue from ACS's wireless business, 
fewer high-margin lifeline wireless customers in GCI's retail business, 
declining subsidy revenue, and the priority of distributions in the first few 
years of the joint venture. 

Our base-case scenario also includes the following assumptions:

     -- Revenue increases about 2% in 2013 and 2014, excluding the wireless 
joint venture, due to growth in data services and managed broadband, partially 
offset by declining voice and cable video revenue. 
     -- Revenue from the wireless joint venture declines about 6% in 2014 (the 
first full year of the partnership) due to declining roaming and subsidy 
revenue.
     -- The EBITDA margin improves to the mid-30% area from around 33% as of 
the third quarter of 2012, because of synergies from the wireless joint 
venture.
     -- Leverage rises to about 5x in 2013 and 2014 before improving in the 
following years.

The ratings on GCI continue reflect a "fair" business risk profile and an 
"aggressive" financial risk profile. Business risk factors include a 
well-positioned, although maturing, incumbent cable-TV business and limited 
competition from satellite video providers; modest growth in wireless and 
broadband; significant exposure to the highly competitive Alaskan telecom 
market; risks related to the wireless partnership; and declining regulatory 
subsidies. Operating lease-adjusted debt to EBITDA was about 4.6x as of Sept. 
30, 2012, although Standard & Poor's Ratings Services believes that key credit 
measures are likely to weaken through at least 2013 due to increased debt to 
fund GCI's $100 million payment to ACS for the wireless joint venture. 

GCI primarily offers telecommunications and cable-TV services in Alaska. The 
local telecom business has shown solid growth, including attaining a wireline 
phone penetration almost equal to that of the incumbent local exchange carrier 
(ILEC) ACS in a number of major Alaskan markets. Still, GCI faces highly 
competitive conditions and is losing customers to wireless substitution as 
that product matures. The network access (long-distance and carrier services) 
business has a leading market share and is bolstered by long-term contracts. 
However, weaker pricing trends, increased competition, and the migration of 
AT&T Mobility's traffic from GCI's network have eroded financial performance 
of this business segment over the past few years, though the company has 
demonstrated some stabilization recently.

GCI's cable segment has favorable business characteristics, and we consider it 
to have a satisfactory business risk profile, similar to that of other midsize 
cable TV operators. The cable business is the dominant provider of video and 
broadband services in Alaska. It also benefits from below-industry-average DTH 
satellite penetration, given the physical limitations placed on DTH by 
Alaska's geography and volatile climate. However, basic subscriber video 
subscribers have declined over the past few quarters, which is comparable with 
industry trends. Growth in the cable segment has primarily reflected increased 
penetration of high-speed data, where GCI has a dominant market share, and 
enhanced video services.

The wireless joint venture offers GCI some business benefits, including 
greater spectrum depth, access to ACS's Long Term Evolution (LTE) network, and 
synergies. Still, the Alaska wireless industry is mature and subject to 
increased competitive pressures when Verizon Wireless enters the market, most 
likely in mid-2013. As a result, we consider the business risk profile of the 
wireless segment to be "fair". Moreover, by combining its assets into the 
wireless partnership, GCI is taking on the risk of declining roaming revenue 
for ACS, most of which comes from Verizon Wireless. While GCI recently 
obtained the popular iPhone as part of its device portfolio, higher handset 
subsidy costs and declining subsidy revenue could hurt wireless profitability 
measures over the next few years.

In the third quarter of 2012, GCI's total revenue was flat, though EBITDA fell 
6% from the prior-year period. Weaker financial performance is primarily due 
to declining cable-TV and telephony customers in the residential segment, 
partially offset by growth in high-speed data services and managed broadband. 
The EBITDA margin declined to 33.3% from 35.5% in the year-ago period but is 
still solid relative to its peers. We expect some margin improvement from 
synergies from the wireless partnership over the next few years.  

Liquidity
GCI's liquidity is "adequate".  Sources of liquidity include $28 million of 
cash and almost full availability under the $75 million senior secured 
revolver as of Sept. 30, 2012, as well as funds from operations (FFO), which 
we expect will be at least $200 million in 2013, assuming a full year of the 
wireless joint venture. We expect cash uses to include at least $150 million 
of capital expenditures, $10 million of debt maturities in 2013, and a $50 
million preferred distribution to ACS as part of the joint venture agreement. 
We expect sources of liquidity to exceed uses by about 1.5x over the next 12 
months and for net sources to remain positive, even with a 15% decline in 
EBITDA.

The bank facility includes a 5.25x total leverage covenant, a 3.0x senior 
leverage covenant, and a 2.5x interest coverage covenant. We believe that 
cushion under the total leverage covenant could decline to below 15% in 2013 
especially if EBITDA declines from current levels, including adjustments in 
the bank agreement, which subtract payments to ACS. If this would occur, we 
would consider revising our liquidity assessment to "less than adequate" from 
"adequate".  

Recovery analysis
The issue-level rating on the senior unsecured debt is 'B+'. The recovery 
rating is '5', which indicates expectations for modest (10% to 30%) recovery 
in the event of payment default. An updated recovery report will be published 
on RatingsDirect following release of this report.

Outlook
The outlook is negative.  We could lower the ratings if GCI experiences 
execution missteps at the wireless partnership or if revenue and EBITDA 
decline in other segments such that leverage rises above 5x on a sustained 
basis. Although we consider it unlikely in the near term, if GCI is successful 
in growing free operating cash flow at the wireless joint venture and its 
revenue growth from cable and the managed broadband businesses can offset 
declines in other segments, such that leverage remains below 5x, we could 
revise the outlook to stable. 

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List

Ratings Affirmed; Outlook Action
                                        To                 From
GCI Inc.
 Corporate Credit Rating                BB-/Negative/--    BB-/Stable/--

Downgraded; Recovery Ratings Revised
                                        To                 From
GCI Inc.
 Senior Unsecured                       B+                 BB- 
   Recovery Rating                      5                  4