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Announcement: Moody's says Consolidated Communications first lien term loan add-on has no effect on ratings
Global Credit Research - 18 Jan 2021
New York, January 18, 2021 -- Moody's Investors Service (Moody's) says that Consolidated Communications, Inc.'s (Consolidated) $150 million first lien senior secured term loan B add-on (Add-on) has no effect on the company's B2 CFR, the B2 rating on the secured credit facility or the stable outlook. Proceeds from the Add-on will be used to largely fund an expansion of the company's current network upgrade plan to an upsized target of 1.6 million fiber passings over the next seven years. This expansion will increase fiber passings to 70% of Consolidated's overall network footprint from 60% under its current plan and enable further EBITDA upside potential.
Consolidated's B2 CFR reflects continued but slowing revenue decline trends exacerbated by continued traditional voice access line losses within its high margin legacy telecom segment, network access revenue erosion, persistent competition from cable and wireless operators and high pro forma leverage (Moody's adjusted) of 5.3x at year-end 2020, which reflects the $150 million Add-on. These negative factors are offset by Consolidated's improved financial flexibility to accelerate investment in its ILEC networks, including upgrading its core northern New England residential network, to now encompass approximately 1.6 million fiber home passings over the next seven years to enhance competitive positioning, grow market share and bolster future revenue and EBITDA growth. Stabilizing declining revenue with network investments and growth from data and transport and broadband services is critical to offsetting declining legacy revenue.
While Consolidated's common stock dividend elimination in 2019 improved free cash flow and enabled greater focus on deleveraging through debt repayment, Moody's expects greater prioritization of capital investments with discretionary cash flow going forward. Given Moody's treatment of preferred stock issued by Consolidated as equity and our expectation of the conversion of a $350 million subordinated note held by Searchlight Capital into preferred equity by mid-year 2021, pro forma leverage (Moody's adjusted) at year-end 2021 will decline towards 4.6x. Consolidated's deleveraging trajectory could also benefit from a further slowing of revenue decline trends and continued cost cutting efforts. The potential for non-core divestitures, but excluding sales of interests in any wireless partnerships which contribute a meaningful portion of consolidated free cash flow currently, would likely amplify planned capital investment efforts or secondarily pay down debt. The company also benefits from diversified operations across carrier, commercial and consumer end markets, as well as an advanced 45,000-plus fiber-route mile backbone network that has more stable revenue prospects than copper-based local exchange carriers.
Moody's views Consolidated's liquidity as good, as reflected by its SGL-2 speculative grade liquidity rating. As of September 30, 2020 and pro forma for the Add-on, the company will have $250 million in cash and cash equivalents and full availability under its $250 million revolving credit facility. Moody's still expects meaningful internal operating cash flow for full year 2020, partly as a result of the 2019 dividend elimination, but also expects increased capital intensity beginning in the fourth quarter of 2020 associated with the early ramping stage of the comprehensive network upgrade plan tied to Searchlight Capital's recent subordinated note investment in the company. We note that the Company expects to avoid cash payments and fully PIK under this subordinated note for the first two years, or through year-end 2022, as it accelerates its primary buildout in its northern New England markets; Consolidated can elect to PIK or pay cash for the first five years of its partnership with Searchlight Capital. The company will face no debt maturities for about five years, further supporting liquidity.
Consolidated is expected to have capital spending of approximately $225 million in 2020 with a meaningful increase to about $340 million in 2021, resulting in an approximate $125 million reduction of free cash flow generated in 2020 to around $25 million in 2021. Under the company's network upgrade plans capital investment as a percentage of revenue will expand from the current teens area to a range around the 25% area for several years, with success-based investing comprising a growing portion of this investing over time.
Moody's rates the company's first lien senior secured credit facility, consisting of a five year $250 million revolver and a seven year $1.4 billion term loan B (inclusive of the $150 million Add-on), and $750 million of eight year first lien senior secured notes B2, in line with the company's B2 CFR. Moody's has not provided any ratings lift relative to the CFR for the loss absorption provide by Searchlight Capital's subordinated note (unrated) given the high likelihood of its conversion to preferred during 2021. The first lien senior secured credit facility and first lien senior secured notes are pari passu. These first lien lenders benefit from a pledge of stock and security in assets of all subsidiaries, with the exception of Consolidated Communications of Illinois and its majority-owned subsidiary, East Texas Fiber Line Incorporated.
The stable outlook reflects our expectation for slowing revenue declines over the next 12-18 months, steady EBITDA margins in the high 30% range and closer to breakeven free cash flow generation as a result of accelerating capital investments. The outlook also assumes conversion of the company's subordinated note into preferred stock over the next 12 months which will drive leverage (Moody's adjusted) to around 4.5x by year-end 2021.
Given Consolidated's current competitive positioning and network upgrade execution risks, upward pressure is limited but could develop if leverage was sustained below 4x (Moody's adjusted) and free cash flow was at least 10% of total debt (Moody's adjusted) on a sustained basis. An upgrade would also require the company to maintain a good liquidity profile.
Downward pressure on the rating could arise should Moody's adjusted debt/EBITDA increase above 5x on a sustained basis or should the company's liquidity deteriorate or should execution of its growth strategy materially slow below budgeted expectations.
Consolidated Communications, Inc. is a broadband and business communications provider offering a wide range of communications solutions to consumer, commercial and carrier customers across a 23-state service area and an advanced fiber network spanning more than 45,000 fiber route miles. The company maintains headquarters in Mattoon, IL. During the last 12 months ended September 30, 2020, the company generated $1.3 billion in revenue.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
Neil Mack, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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