(The following statement was released by the rating agency)
-- U.S. rural local exchange carrier Consolidated Communications is
acquiring overbuilder and incumbent cable-TV operator SureWest for $341
million, of which 50% will be in the form of equity, plus refinancing of $200
million of SureWest debt.
-- The company is issuing $350 million of unsecured notes to partially
fund the transaction.
-- We are affirming our 'B+' corporate credit rating on the company,
upgrading the secured credit facility to 'BB-' from 'B+', and assigning a 'B-'
rating to the proposed unsecured notes offering.
-- The stable outlook reflects the relative predictability of the
company's overall base of business, at least through mid-2013.
On May 14, 2012, Standard & Poor's Ratings Services assigned its 'B-'
issue-level rating and '6' recovery rating to rural local exchange carrier
(RLEC) Consolidated Communications Inc.'s proposed $350 million of senior
unsecured notes due 2020. The '6' recovery rating indicates expectations for
negligible (0%-10%) recovery in the event of payment default.
We also raised the issue-level rating on the company's senior secured credit
facility, which consists of a $50 million revolving credit facility due 2016,
a $409.1 million term loan due 2017, and a $470.9 million term loan due in
2014, to 'BB-' from 'B+' and revised the recovery rating to '2' from '3'. The
'2' recovery rating indicates expectations for substantial (70%-90%) recovery.
The higher recovery rating on the secured credit facility, which includes an
aggregate of $880 million in term loans and a $50 million revolving credit, is
due to the addition of the SureWest business as collateral.
At the same time, we affirmed our 'B+' corporate credit rating on Mattoon,
Ill.-based parent company Consolidated Communications Holdings Inc. The
outlook is stable.
The rating affirmation reflects our belief that the acquisition of overbuilder
and incumbent cable-TV operator SureWest (unrated) will not materially change
Consolidated's "weak" business risk profile, which includes our expectations
for relatively flat overall revenue levels due to pro forma voice access-line
declines of about 6% in 2012, coupled with modest growth in video and data
revenues. Likewise, we expect its "aggressive" financial risk profile to
remain largely unaltered.
Consolidated Communications is a midsized RLEC providing a wide range of
communications services to residential and business customers in Illinois,
Texas, and Pennsylvania. It is acquiring SureWest, which serves markets in
California and Kansas in a transaction requiring about $170 million of cash,
plus refinancing of $200 million of SureWest debt. The combined company will
serve about 100,000 video subscribers, around 426,000 voice access lines, and
213,000 data customers.
The combined company's EBITDA margin for 2011 was about 37% and we expect the
margin to remain around this level over the next few years. We believe that
heightened costs of aggressively marketing and provisioning video and
broadband services, especially in the SureWest territories, coupled with lower
Universal Service Fund (USF) funds and access revenues, will at least
partially offset achieved operating synergies from SureWest, which the company
is targeting at $25 million. Resultant leverage is expected to be nearly 5x
for 2012, including distributions received from wireless partnerships, and is
not likely to improve over the next few years, given flat to modestly
declining margin assumptions. Moreover, near-term discretionary cash flows
will be negative and longer term only modestly positive, due to the company's
targeted dividend payout for the pro forma company of about $60 million
To mitigate the effect of line losses, over the past few years, the company
has upgraded its network to expand its digital subscriber-line (DSL) and
Internet protocol (IP) TV services. It will continue to deploy fiber in its
region, as well as expanding facilities in the SureWest footprint. Residential
video service has good growth potential, given the relatively limited current
penetration of addressable homes of this service of about 19% as of Dec. 31,
2011, on a pro forma basis. Growth in the IPTV subscriber base also provides
the company competitive winback opportunities. However, due to its small
scale, even with the SureWest acquisition, we expect that it will continue to
have relatively high customer provisioning and programming costs.
With the acquisition of SureWest, Consolidated has also reduced its reliance
on composite state and federal USF sources. These represented 12% of revenues
for 2011, and will drop to about 8% of revenues on a pro forma basis. Given
the FCC's October 2011 order on USF, we expect these revenues will continue to
decline. While the company will also continue to lose access revenues due to
the FCC intercarrier compensation rules adopted in the same order, we also
expect Consolidated to also obtain some cost savings from lower access fees to
The company's near-term liquidity is "less than adequate" due to its limited
cushion of around 12% currently, under its total maximum leverage test of
5.25x. However, given its relatively stable cash flow and lack of major debt
maturities until 2014, and with the addition of the SureWest operations,
Consolidated should be able to meet this covenant with at least 15% EBITDA
cushion on an ongoing basis. Therefore, once the company reaches the 15%
EBITDA cushion after the acquisition, we are likely to revise our liquidity
assessment to "adequate" if we believe Consolidated will maintain this minimum
Sources of liquidity consist of about $52 million in cash and $50 million
available under its revolving credit facility, pro forma for the SureWest
transaction. We also expect pro forma funds from operation to be at least $150
million annually. We expect capital expenditures to be elevated, and represent
on average about 15% of revenues over the next few years as the company
aggressively targets growth in its IPTV customers, as well as growing fiber to
the home, and expanding its IP capability to serve business customers. While
Consolidated's pro forma dividend will be sizable, at about $60 million, it
has some discretion to curtail dividends to bolster liquidity. However, we do
not expect the company to use this flexibility unless it is under financial
stress. If net debt leverage exceeds 5.1x, the dividend must be suspended
according to the terms of the credit facility.
For the full recovery analysis, see the recovery report on Consolidated, to be
published shortly on RatingsDirect.
The outlook is stable. The relative predictability of the company's overall
base of business provides stability for the rating at least through mid-2013,
and the purchase of SureWest provides some good growth potential in the video
services market. However, if the combined company's line losses materially
accelerate from current levels, we could lower the rating, particularly if
this results in leverage rising above the low-5x area. In addition, lower
dividend distributions from the wireless partnerships could lead to leverage
exceeding the low-5x area, which could result in a downgrade. These factors
could also impair the company's ability to meet its leverage covenant.
While unlikely in the near term, if Consolidated's IPTV efforts, including
deployments in the SureWest markets, contribute to significantly lower
access-line losses despite economic pressures, we could raise the rating,
especially if this contributes to improvement in leverage to the 3x area.
Related Criteria And Research
-- Top 10 Investor Questions: U.S. Telecom and Cable Industries, May 10,
-- Assessing The Four-Notch Rating Gap Between The Two U.S.
Direct-To-Home Satellite Video Operators, May 9, 2012
-- Issuer Ranking: U.S. Telecommunications And Cable Companies, Strongest
To Weakest, April 26, 2012
-- Industry Report Card: U.S. Telecommunications And Cable: Some Islands
Of Weakness In A Relatively Stable Sea, April 25, 2012
-- U.S. Cable Sector Overview: Growth Slows As The Industry Matures,
March 21, 2012
-- Adapting Could Be Cable TV's Key To Meeting The OTT Challenge, Sept
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
Consolidated Communications Holdings Inc.
Corporate Credit Rating B+/Stable/--
Consolidated Communications Inc.
US$350 mil nts due 2020 B-
Recovery Rating 6
Upgraded; Recovery Ratings Revised
Consolidated Communications Inc.
Senior Secured BB- B+
Recovery Rating 2 3
(Caryn Trokie, New York Ratings Unit)