The upgrades incorporate the improved credit and operating profile of OneLink following the transaction.
The outlook is now stable, and a summary of today's actions follows.
San Juan Cable, LLC
.... Probability of Default Rating, Upgraded to B2 from B3
.... Corporate Family Rating, Upgraded to B2 from B3
....First Lien Credit Facility, Upgraded to B1 (LGD3, 39%) from B2 (LGD3, 34%)
....Second Lien Credit Facility, Upgraded to Caa1 (LGD6, 90%) from Caa2 (LGD5, 87%)
Outlook, Changed To Stable From Rating Under Review
Liberty Cablevision of Puerto Rico, Ltd.
.... Probability of Default Rating, Withdrawn, previously rated B2
.... Corporate Family Rating, Withdrawn, previously rated B2
....Senior Secured Bank Credit Facility, Withdrawn, previously rated B1, LGD3, 39%
RATINGS RATIONALE
The $100 million all cash, all common equity contribution from Searchlight and the lower leverage of LCPR improves the credit profile of OneLink, with expectations for leverage in the low 6 times debt-to-EBITDA range, compared to over 7 times for OneLink on a standalone basis as of June. Furthermore, the combined entity benefits from greater scale and both cost and revenue synergies. Moody's also views the LGI ownership as a credit positive given its strategic interest in the company, scale, and experience in integrating acquisitions, compared to OneLink's prior ownership by private equity sponsors MidOcean Partners and CrestView Partners.
San Juan Cable, LLC, is the borrowing entity, and LCPR's existing first lien term loan has been converted to an additional term facility under the San Juan Cable, LLC credit agreement, ranking pari passu with existing San Juan Cable, LLC, first lien debt. The $10 million LCPR revolver has been terminated, with the existing $25 millionSan Juan Cable, LLC, remaining in place.
Expectations for high leverage and limited free cash flow, combined with geographic concentration, lack of scale, and execution risk position OneLink weakly within its B2 corporate family rating. Furthermore, its penetration trends lag behind rated US cable peers, and competition will likely intensify. However, the 60% ownership by LGI somewhat mitigates the concern over scale, and Moody's expects the company to benefit from LGI's experience in integrating acquisitions. The combination of the two entities should yield both revenue and cost synergies and enhance the competitive position.
The stable outlook incorporates expectations for leverage to fall below 6 times debt-to-EBITDA in 2013 and for the company to generate at best neutral, or potentially modestly negative, free cash flow, due to investments in the network and costs to achieve synergies before realization of benefits of the merger. The stable outlook assumes improvement in both leverage and free cash flow in 2014, as well as maintenance of adequate liquidity.
Execution risk, geographic concentration, lack of scale and weak credit metrics constrain upward momentum. An upgrade is highly unlikely absent a transformative event that improved the company's operating profile, or an unexpected improvement in the credit profile such that Moody's expected sustained leverage around 4 times debt-to-EBITDA and free cash flow to debt sustained in the high single digits. An upgrade would also require expectations for maintenance of good liquidity.
Inability to lower leverage or expectations for negative free cash flow in 2014 could warrant a downgrade. Deterioration of the liquidity profile could also have negative ratings implications.
The combined entity, 60% owned by LGI and 40% by Searchlight, will pass approximately 700,000 homes in Puerto Rico and have annual revenue of about $300 million.
The principal methodology used in rating San Juan Cable, LLC was the Global Cable Television Industry Methodology published in July 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
San Juan Cable, LLC (OneLink) provides television, high speed data and telephone services to residential and commercial customers in the greater San Juan area. Its revenue for the twelve months ended June 30 was approximately $182 million. San Juan Cable LLC was previously owned primarily by MidOcean Partners and Crestview Partners.
Liberty Cablevision of Puerto Rico, LLC (LCPR) provides video, voice, and internet access services to commercial and residential customers in Puerto Rico. The company reported revenue of $119 million for the twelve months end June 30.
Liberty Global, Inc. (LGI) is an international communications provider of video, broadband, internet and telephony services, with consolidated broadband communications and/or direct-to-home satellite operations in 13 countries; primary operations are located across Europe and Chile. LGI had 20 million customers as of September 30.
REGULATORY DISCLOSURES
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Karen BerckmannAsst Vice President - Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653John Diaz MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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