Reuters logo
TEXT-S&P rates Consolidated Communications Inc
May 14, 2012 / 3:40 PM / 5 years ago

TEXT-S&P rates Consolidated Communications Inc

(The following statement was released by the rating agency)	
	
Overview	
     -- 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.	
	
Rating Action	
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. 	
	
Rationale	
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 	
annually.	
	
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 	
other carriers.	
	
Liquidity	
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 	
cushion. 	
	
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.	
	
Recovery analysis	
For the full recovery analysis, see the recovery report on Consolidated, to be 	
published shortly on RatingsDirect.	
	
Outlook	
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, 	
2012	
     -- 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 	
27, 2011	
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011	
	
Ratings List	
	
Ratings Affirmed	
	
Consolidated Communications Holdings Inc.	
 Corporate Credit Rating                B+/Stable/--       	
	
New Ratings	
	
Consolidated Communications Inc.	
 Senior Unsecured	
  US$350 mil nts due 2020               B-                 	
   Recovery Rating                      6                  	
	
Upgraded; Recovery Ratings Revised	
                                        To                 From	
Consolidated Communications Inc.	
 Senior Secured                         BB-                B+	
   Recovery Rating                      2                  3	
	
 (Caryn Trokie, New York Ratings Unit)

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below