Research:Return to Regular Format
Industry Report Card: U.S. Telecom & Cable TV Report Card
Publication date:06-Aug-2002
Credit Analyst: Richard Siderman, New York (1) 212-438-7863; Rosemarie Kalinowski, New York (1) 212-438-7841; Catherine Cosentino, New York (1) 212-438-7828; Michael M Tsao, CFA, New York (1) 212-438-7832


Key Issues Affecting Credit Quality in the U.S. Telecommunications & Cable Industry

At the very least, 2002 has proven to be a pivotal year for the telecommunications industry. While it was widely expected that many of the start-up telecommunication companies would encounter trouble (witness the very low ratings on competitive local exchange carriers [CLECs]), perhaps much more surprising were the difficulties faced by established companies. The problems experienced by now bankrupt Adelphia Communications Corp. and WorldCom Inc. followed revelations of severe accounting irregularities. These initial problems then worsened into criminal investigations, and Qwest Communications International Inc. is now under criminal investigation. The fallout has overlapped into the whole telecommunications sector and has expanded into global markets as investors have become distrustful of financial statements, including audited statements, in general.

Recognizing the very cautious investor sentiment for the sector, coupled with the impact of slower economic growth, Standard & Poor's sees the outlook for telecommunications for the balance of the year as generally negative. Importantly, however, the general investor pessimism for the sector should not obscure the fact that, despite new and often formidable challenges, many telecommunications companies have retained good market positions in still solid business segments.

Verizon Communications Inc., BellSouth Corp., and SBC Communications Inc. have strong and still relatively well-protected incumbent local exchange carrier (ILEC) businesses. While these and other ILECs have faced more competition since the Telecom Act of 1996 and, indeed, CLEC lines are increasing and unbundled network element price reduction may spur CLECs, the fact remains that a lot of these would-be competitors have gone bankrupt. In addition, more long distance entry by the regional Bell operating companies (RBOCs), while not devoid of risks, holds the potential for significant new revenues with good margins. Moreover, though RBOC long-distance entry will be initially in the residential markets, RBOCs will certainly look to penetrate SME and other enterprise niches in the long term.

The business positions of the smaller rural local exchange carriers (RLECs) benefit from less competition and the continued support of a communications policy that provides an explicit and implicit subsidy framework. Although there is always the possibility that the historic support of rural telephony by lawmakers could wane, given the importance of RLECs to their constituents, rural lawmakers, especially those in the Senate, have a lot of clout in ensuring that telecommunications remain affordable for their constituents. In addition, while subsidies per rural customer can be surprisingly high, the aggregate amount of such subsidies on a national basis is probably not enough to jeopardize this RLEC revenue in the foreseeable future given political realities.

Actions regarding WorldCom, Qwest, and cable operator Adelphia Communications have grabbed the ratings spotlight. These companies have many of the same problems: accounting issues have led to SEC and criminal investigations. However, the fundamental business problems of these three companies vary significantly. WorldCom became vulnerable to severe pricing pressure, as it underestimated the glut of telecom and broadband capacity and overestimated the demand for data and other broadband transmission services. Ironically, WorldCom's woes have the potential to bolster revenues for its competitors as WorldCom customers seek alternate carriers to ensure continuity of service.

Standard & Poor's views Qwest as having a significantly better business risk profile than WorldCom. However, Qwest has come under pressure due to what have become relatively near-term liquidity concerns. While its core ILEC business is still healthy, the company's ability to meet financial covenants and maturities in 2002 and 2003 is questionable. Much depends not only on the company's ability to sell its directory business but its ability to close a transaction in time to avoid a liquidity shortfall. The ability of regulators to potentially postpone the sale of all of the directories business is problematic. Yet Standard & Poor's has identified a path for Qwest to improve its rating and to regain an investment-grade financial profile in the foreseeable future. If it can solve its near- to medium-term liquidity dilemma and if the SEC and criminal investigations have only a limited impact, Qwest has the ability to improve its credit quality.

Adelphia has experienced a spiral of negative events that drove the company to bankruptcy. However, Adelphia's situation has very little to do with its core business. Its cable operations are solid, well positioned, and generate solid operating parameters. The revelation of borrowings by entities related to the then-controlling family led to investigations and prevented the company from filing certain financial documents. This, in turn, led to technical and cash defaults, the delisting of its stock, SEC and criminal investigations, and finally to Chapter 11.

In general, the industry outlook for telecommunications is clouded by extreme investor wariness and weakness in some key segments. For local exchange companies (LECs), the outlook is fairly good with the potential for weak access line growth to be at least somewhat mitigated by more digital subscriber line (DSL) penetration and for the RBOCs as they make more headway into long distance. Verizon and other RBOCs have shown that long distance can be a profitable business segment with only modest capital spending. These LECs, to varying degrees, can still gain very high margin revenue from CLASS or custom calling service. Moreover, personnel cutbacks enable lower costs to at least partially offset softer revenues. In addition, capital spending is likely to be down from the past couple of years, as much of the backbone upgrades are complete, as is the incremental capital spending to accommodate CLECs. A good portion of the capital spending will also be success-based, especially in connection with DSL deployment where much of the capital is deployed as incremental customers are added.

Standard & Poor's still views cable television as a solid, high EBITDA margin business. Cable continues to have a good business position and, though direct broadcast satellite (DBS) has become a genuine competitor, in most cases cable is still the dominant supplier of pay television services. While digital services have not realized the revenue potential anticipated by some in the industry, they have served as a needed defense against DBS's former claim to superior channel capacity. In addition, cable modems have proved surprisingly successful and can be deployed with only modest incremental capital spending and produce a reliable, good margin cash flow stream. Moreover, thus far cable modems are better, from both economic and technical viewpoints, delivery mechanisms for high-speed data versus DBS offerings. Still, Standard & Poor's is keenly aware of the current state of investor sentiment towards the industry and is monitoring the potential impact this could have on the liquidity of cable operators. The cable industry historically received a welcome reception from public capital markets and from banks. Standard & Poor's will closely watch to see if the fallout from Adelphia or if other developments negatively impact the cable industry's access to capital.


Acronym Glossary

ARPU -- Average revenue per unit

CLEC -- Competitive local exchange carrier

DSL -- Digital subscriber line

ILEC -- Incumbent local exchange carrier

IXC -- Inter-exchange carrier

LEC -- Local exchange carrier

MSO -- Multiple system operator

Pops -- Population equivalents

RBOC -- Regional Bell operating company

RGU -- Revenue generating unit

RLEC --Rural local exchange carrier

Cable TV
Cable Companies Corp. Credit Rating /Outlook/ Commercial Paper Rating Analyst Comment
Adelphia Communications Corp. D/NM/-- Siderman Adelphia Communication's CCR was lowered to 'D' after it missed a May interest payment and the company filed for Chapter 11 bankruptcy protection on June 25, 2002. These problems were precipitated by its March 27 revelation of its contingent liability for unconsolidated bank loans to certain controlling family entities. A series of negative revelations and events led to the defaults and bankruptcy filing. Adelphia is seeking DIP financing as part of its reorganization.
Block Communications Inc. B+/Stable/-- Tsao Current ratings reflect its small size, increased capital expenditures over the next two years, and uncertain outcome of negotiation with its newspaper unions.
Cablevision Systems Corp. BB+/Negative/-- Cosentino Launched digital service in Long Island in the fall, although large-scale introduction of digital is not targeted until the second half of 2002. The delay in digital has limited borrowing requirements through the first quarter of 2002, with debt to annual EBITDA totaling 6.4x. Yet, it is expected to require additional financing in 2003 for digital and various project development costs. Ratings would be lowered if debt to EBITDA exceeds 8x, ex. pref. stock and collateralized debt.
Charter Communications Inc. BB/Negative/-- Siderman Outlook lowered to negative on Feb. 12 reflecting delay in improvement in key financial parameter. S&P cites debt/EBITDA of 7.9x or less as appropriate but was 8.1x in 2001. With good execution, financial ratios could improve to supportive levels by the third quarter of 2002. Little if any basic subscriber growth is expected but revenues should grow solidly from digital and cable modems. Rising programming costs and expenses related to new service rollout could mitigate cash flow impact of new RGUs.
Comcast Corp. BBB/Watch Neg/-- Siderman Remains on CreditWatch negative as a result of its Dec. 2001 agreement to merge with AT&T Broadband, which is expected to close in late 2002. Comcast's ratings are likely to be 'BBB' or 'BBB-'. Ratings will depend on a review of factors, including management's plan to reduce debt, esp. to monetize Time Warner Entertainment; realize synergies; integrate operations and managements; and strategy for cable telephony to which Comcast seems somewhat favorably disposed. Key will be how quickly and to what extent Standard & Poor's anticipates that Comcast can bring the AT&T margins closer to its own.
Echostar Communications Corp. B+/Watch Pos/-- Kalinowski Ratings are on CreditWatch positive due to a $1.5 billion equity investment from Vivendi Universal, cost and revenue synergies derived from a DirecTV and Echostar combination, and the improved competitive position of the combined company. Upside rating potential would be a function of the final capital structure of an EchoStar/Hughes/PanAmSat or EchoStar/PanAmSat combination. Operating performance has been above Standard & Poor's expectations and cash flow generation is expected to escalate in 2002 as a result of economies of scale from a growing subscriber base. However, the company's deleveraging pace will depend on the merger outcome.
Insight Communications Co. Inc. B-/Stable/-- Cosentino Ratings and outlook should remain stable, reflecting the high refinancing risk from the company's corporate structure. Insight Communications is a holding company whose only material asset is its 50% stake in Insight Midwest. Because no dividends are expected in the next several years, ultimate payment of Insight Communications' debt depends on refinancing or asset sale. In the first quarter 2002, the company lent $100 million to Insight Midwest L.P.
Insight Midwest L.P. BB/Stable/-- Cosentino Insight continues to perform well with consistent increases in penetration of digital and high-speed data services. Despite expected double-digit EBITDA growth in 2002, it should remain highly leveraged due to additional drawdowns in the credit facility to finance the upgrade of the IL system, telephone rollout, and continued digital expansion.
Mediacom Communications Corp. BB/Stable/-- Siderman Some of the anticipated weakening of credit measures from the purchase of cable systems from AT&T in 2001 was mitigated by purchase price adjustments and improvement in margin for those subscribers under Mediacom management. First quarter results were good, with improvement in the ATT system margins. Adjusted debt to EBITDA for the first quarter was near the 8x area, in line with Standard & Poor's expectations, and the rollout of new services and headend consolidation suggest solid improvement in financial measures. Debt per subscriber of about $1,800 and the fairly rural nature of systems are limiting factors for the rating.
Northland Cable Television Inc. B+/Negative/-- Kalinowski Key credit risks include limited liquidity and potential covenant violations in its bank credit facility. However, management indicated it would defer management fees to ensure compliance with covenants. The company was in compliance with first quarter 2002 covenants. Sale of certain cable assets during the fourth quarter of 2001 brought debt to EBITDA to slightly under 6.5x.

CLEC
CLECs Corp. Credit Rating /Outlook/ Comm. Paper Analyst Comment
Allegiance Telecom Inc. CCC/Watch Neg/-- Kalinowski Rating lowered on June 4, 2002, due to continued weak fundamentals of the CLEC industry and the potential risk that the company may need to seek a waiver on the minimum revenue covenant under its $500 million secured bank facility in the second or third quarter of 2002. In addition, the company's churn rate has been trending upward due to competition and recession-induced customer financial difficulties. As of March 31, 2002, the company's liquidity position consisted of $360 million of unrestricted cash and $150 million available under the bank facility.
Choice One Communications Inc. CCC-/Watch Neg/-- Tsao With less than $30 million in liquidity as of mid-May 2002, the company has virtually no cushion against execution risks arising from the weak economy and poor fundamentals of the CLEC industry.
ITC DeltaCom Inc. D/NM/-- Kalinowski Lowered to 'D' due to the company missing the May 15, 2002, interest payments on its unsecured notes.
KMC Telecom Holdings Inc. CCC-/Watch Neg/-- Kalinowski Liquidity remained weak in the first quarter of 2002. In May 2002, the company amended its bank facility and obtained waivers for covenant failures. In addition, certain banks agreed to defer payment of at least $26 million of principal payment due April 1, 2003, to June 30, 2003, in exchange for a certain amount of senior notes purchased by the company in the open market. The ratings remain on CreditWatch because there is near-term potential that the company will restructure its debt.
Pac-West Telecomm Inc. CCC/Watch Neg/-- Tsao The company continues to operate in a cost reduction and liquidity preservation mode. Its ability to survive remains highly questionable due to still-substantial revenue exposure to ISPs and reciprocal compensation (i.e., turmoil in the ISP sector, and reciprocal compensation rates will fall by more than 50% in 2003). Pac-West's ability to operate through early 2003 depends on its ability to renew its bank credit facility or obtain alternative financing in mid-2002.
RCN Corp. CCC+/Negative/-- Tsao Although the recently amended credit agreement provides immediate relief from covenants, liquidity is forecasted to weaken considerably through 2002 due to continuing operating losses, ongoing capital expenditures, and lack of access to additional bank credit for two years. At the end of the first quarter of 2002, total liquidity was about $500 million and would provide little cushion against execution risks.
Time Warner Telecom Inc. B+/Negative/-- Cosentino The outlook revised to negative from stable March 5, 2002, due to increased business risk resulting from the impact the weakening domestic economy has had on its business base. TWT's credit profile will be weak for the rating over the next year due to the pressures of the economic slowdown. Ratings could be lowered if TWT's performance in 2002 is not at least flat with that of 2001, or if it is not able to improve financial measures in 2003.

Diversified Telecommunications
Diversified Companies Corp. Credit Rating /Outlook/ Comm. Paper Analyst Comment
ALLTEL Corp. A/Negative/A-1 Cosentino The rating was affirmed and removed from CreditWatch on April 26, 2002. The negative outlook reflects increased initial leverage for debt financing of Verizon A/L and CTL wireless acquisitions for a total of $3.6 billion. Pro forma for the transactions, debt to EBITDA is expected to be 2.1x for 2002. Yet ratings reflect the expectation that company will reduce debt in 2003 from excess operating cash flow sufficient to reduce debt to EBITDA below 2x in 2003.
AT&T Corp. BBB+/Watch Neg/A-2 Kalinowski The CreditWatch negative listing refers to AT&T Broadband's rating which will be either 'BBB' or 'BBB-', depending on the resolution of Comcast Corp.'s rating. Based on current information and the ability of AT&T Corp. to execute its business plan and continue its deleveraging strategy, the surviving entity, AT&T Communications Services Inc., is expected to have a corporate credit rating of 'BBB+' with a stable outlook. AT&T Corp.'s first quarter earnings continued to reflect the impact of the economy, technology substitution, and RBOC entry.
BellSouth Corp. A+/Stable/A-1 Cosentino BellSouth continues to experience the effects of the economic slowdown and competition on its A/L count and revenue growth. However, through cost cutting the company was able to achieve debt to annual EBITDA of 1.7x for the first quarter of 2002, including its 40% share of Cingular debt and EBITDA. In May 2002, BellSouth received interLATA relief in Georgia and Louisiana, which is expected to enhance its overall operating cash flows. Prospects for the Latin American wireless businesses remain somewhat uncertain, in light of defaults by 44.5%-owned Brazilian wireless carrier BCP and 65%-owned Argentine wireless carrier Movicom.
Broadwing Inc. BB/Stable/B Tsao Although the company's local incumbent and wireless businesses continue to show solid performance, this has been offset by continued weakness at its long-haul data subsidiary Broadwing Communications. A reduction in bank debt with about $345 million in proceeds from the sale of the directory business in March 2002 has removed near-term concerns over covenants. However, with bank debt repayment scheduled to increase significantly in 2004, Broadwing has to refinance in 2003.
CenturyTel Inc. BBB+/Stable/A-2 Tsao By focusing strictly on the rural wireline business after divesting its lackluster wireless business to ALLTEL in the first quarter of 2002, the company's business profile will likely improve in the long run. In an effort to bridge the $900 million gap between the $2.2 billion price of 675,000 access lines from Verizon and $1.3 billion in proceeds from the sale of the wireless business, the company raised $500 million in proceeds from the sale of the equity units in May 2002. The remaining $400 million will likely be satisfied through a bank credit facility. CenturyTel has already received regulatory approval for the Verizon access lines and a waiver of the "All or Nothing" rule that allows some markets to be operated under rate-of-return regulation and others under price-cap regulation.
Citizens Communications Co. BBB/Negative/A-2 Cosentino Citizens added significant debt in 2001 due to acquisitions, and net debt, excl. equity units, was about $4.9 billion at March 31, 2002, with net debt to EBITDA of 4.3x, excl. special charges. The company is expected to delever in 2002 from utility asset sale proceeds, incl. the sale of the water business that closed in January 2002 ($979 million) and the sale of the Hawaiian electric property, which is expected to close no later than the first quarter of 2003 ($215 million). To maintain the ratings, Citizens will have to reduce net debt to EBITDA to 4x for 2002, and to less than 3.5x in 2003 (excl. $460 million in equity units and first quarter 2002 special charges).
GCI Inc. BB/Stable/-- Tsao GCI is an incumbent cable operator and a leading provider of competitive long-distance and local telecommunications service. With digital and cable modem penetration below 20%, there are still good growth prospects. In the competitive telecommunications business, GCI has demonstrated solid execution by obtaining a 45% share of the overall Alaskan long-distance market and a 40% share of local service in Anchorage, Alaska's largest market. Improved operating efficiencies allowed the company's EBITDA margin to increase to 29% in the first quarter of 2002 from 27% in 2001.
NTELOS Inc. B/Negative/-- Cosentino The company was removed from CreditWatch on March 20, 2002, following its announced receipt of amended bank covenants, which mitigated near-term liquidity concerns. A negative outlook was assigned because it must materially improve the financial performance of its PCS operations in 2002 to maintain a credit profile supportive of the current rating. For the first three months of 2002, the company turned EBITDA positive in its overall wireless business.
Qwest Communications International Inc. B+/Watch Dev/-- Cosentino The company was downgrade on July 17, 2002, based on Standard & Poor's assessment that there is a higher degree of uncertainty regarding the company's ability to meet the debt-to-EBITDA covenant in its $3.4 billion bank loan, coupled with increased risk that the company will not be able to meet its roughly $6.5 billion in maturities beginning in May 2003 and continuing through 2004 (including repayment of the bank loan, which is due in early May 2003). While Qwest has announced its plans to sell its entire directories business for about $8 billion to $10 billion, it is likely that it will have to sell directories on a piecemeal basis to expedite receipt of proceeds because sale of a portion of the business is subject to regulatory approval by at least several states and the timing for such approval is even more uncertain. Moreover, proceeds from the unregulated part of the business and attendant debt paydown may prove insufficient to meet the 4x debt-to-EBITDA test in the bank loan agreement.
SBC Communications Inc. AA-/Stable/A-1+ Cosentino SBC has received interLATA relief in Texas, Oklahoma, Kansas, Arkansas, and Missouri. It is the highest rated of the telecommunications companies rated by Standard & Poor's. Given the stability of its ILEC business and the EBITDA growth of Cingular Wireless LLC, in which SBC has a 60% ownership interest, SBC's profile is expected to continue to support its ratings, with EBITDA interest coverage expected to exceed 10x, despite expectations that the slowing economy will limit wireline growth prospects.
Sprint Corp. BBB-/Stable/A-3 Kalinowski The company was downgraded on June 14, 2002, due to the weakened business risk profile of the wireless industry and continued weak fundamentals of the long-distance industry. Guidance for net wireless customer additions was lowered about 10% to 15% for 2002 from a previous forecast of three million. This revision was due to increased competition from other nationwide wireless providers and a refining of Sprint PCS's credit policies for certain sub-prime customer segments.
Telecomunicaciones de Puerto Rico Inc. BBB/Stable/A-2 Kalinowski Local access lines have declined 1% since March 2001 due to the softening economy, wireless substitution, and increased competition. In addition, long-distance revenue decreased 17% in the first quarter of 2002 compared with the same quarter in 2001 primarily due to long distance being included in cellular calling plans. Wireless, which comprises 15% of revenues, decreased 6% due to the decrease in paging customers and lower equipment sales. However, cellular services revenues increased 8% due to an increase in postpaid customers and higher ARPU.
Telephone & Data Systems Inc. A-/Negative/-- Cosentino The outlook was revised to negative from stable on May 10, 2002, following the company's announced definitive agreement to acquire PrimeCo PCS's Chicago wireless business for $610 million. Pro forma for the transaction, debt to EBITDA is expected to be about 2.9x. Although credit metrics will be somewhat weak for the rating in 2002, TDS derives significant financial flexibility from holdings of about $1.4 billion in Deutsche Telekom AG stock and other non-core assets.
Verizon Communications Inc. A+/Negative/-- Kalinowski First quarter 2002 revenues declined 4% compared with the fourth quarter of 2001 due to the slow economic recovery and the impact on second access lines from broadband and wireless substitution. However, the company's diversified revenue mix, which includes wireless and increasing long-distance entry, and its cost controls should offset some of the weakness in wireline. The company's debt reduction strategy is on target. Debt to EBITDA is anticipated to be 2x by year-end 2002.
WorldCom Inc. D/NM/-- Kalinowski The company filed Chapter 11 on July 22, 2002.

Miscellaneous Telecommunications
Miscellaneous Companies Corp. Credit Rating /Outlook/ Comm. Paper Analyst Comment
American Tower Corp. B+/Stable/-- Tsao Core tower leasing activity remains solid, but the non-strategic teleport business remains weak. By cutting back on capital expenditures, the company currently has adequate funding through late 2003. Because tower-related spending by wireless carriers typically increases in the second half of a given year, operating results in the third and fourth quarters will be critical in determining the company's ability to reduce debt to EBITDA of 13x to about 9x by year-end 2002.
Cox Enterprises Inc., Cox Communications Inc., and Cox Radio Inc. BBB/Stable/A-2 Cosentino Leverage for the consolidated group edged up in 2001 due to weakness in its advertising-based businesses. However, operating performance is solid in cable, its largest segment, and its TV, radio, and newspaper divisions are well-positioned for the end of the cyclical downturn. Standard & Poor's expects the company to operate with consolidated debt to operating cash flow in the low-4x area for the current rating.
Crown Castle International Corp. B+/Stable/-- Tsao By undertaking a major restructuring in mid-2001 and significantly reducing capital expenditures, the company has boosted its liquidity to more than $1.3 billion. This level of liquidity should provide the company with greater cushion against execution risks than other tower operators and fund the company into 2004. As with other tower operators, the risk profile of the company greatly depends on the direction of tower-related spending by wireless carriers in 2002 and 2003.
Evercom Inc. D/--/-- Cosentino The rating was lowered to 'D' on Aug. 6, 2002, based on the company's announcement that it did not pay $6.3 million in interest on its senior unsecured notes that was due on July 1, 2002.
Genuity Inc. CCC-/Watch Neg/-- Kalinowski The company was downgraded on July 25, 2002, due to Verizon Communications Inc.'s decision that it would not reintegrate Genuity, leading to an event of default under Genuity's bank credit facility and its credit facility with Verizon. About $3.5 billion of debt is outstanding, of which about $1.87 billion is related to the bank credit facility. The company is currently in discussions with the banks.
Hughes Electronics Corp. BB-/Watch Neg/-- Kalinowski Standard & Poor's has indicated that a combined Hughes/EchoStar/PanAmSat or EchoStar/PanAmSat rating would be either 'BB-' or 'B+'. A Hughes stand-alone rating, should the merger fail, would be 'BB-'. Ratings are likely to remain unchanged for both Hughes and PanAmSat until there is more clarity on the merger outcome.
Infonet Services Corp. BB-/Stable/-- Cosentino The ratings were lowered and removed from CreditWatch on Feb. 28, 2002. The company's business risk as a data communications provider to large enterprise customers has increased recently due to softening global economies, which have impacted large corporate customers' data purchasing decisions. Growth prospects in 2002 remain somewhat uncertain.
Intelsat Ltd. A/Negative/A-1 Tsao The company is one of the largest providers of fixed satellite services and derives about 80% of revenues from providing voice/data services. The company faces a number of execution risks that include weakness in the voice/data sector, potential pricing pressure on transponder service, and its transition to a privately managed business from an intergovernmental organization. A planned IPO in mid-2002 has been temporarily postponed due to weak market conditions.
Level 3 Communications Inc. CCC/Negative/-- Tsao The company faces significant challenges as it attempts to secure more business from established enterprise accounts. Weak industry fundamentals are likely to persist in the wholesale bandwidth and collocation markets for the foreseeable future. The company's ability to generate adequate cash flow over the longer term relative to its $6.4 billion total debt is highly uncertain. Level 3 was able to satisfy its minimum revenue bank covenant by acquiring two software companies.
Loral Space & Communications Ltd. Loral Cyberstar Inc. B/Negative/--B/Negative/-- Tsao The company's financial profile has deteriorated, with lower revenue and EBITDA guidance for 2002 due to weakness in its fixed satellite services business. The manufacturing business continues to experience slow demand. Credit risks remain high due to leverage and limited liquidity.
Primus Telecommunications Group Inc. CCC+/Negative/-- Cosentino Primus is expected to fund cash operating and capital requirements through at least the first quarter of 2003. The company has substantially reduced debt over the past 18 months through open market purchases and conversion of debt to common stock, with debt totaling $628 million at March 31, 2002, versus $1.3 billion at Dec. 31, 2001. A slowdown in worldwide economic growth has significantly limited growth prospects in recent periods. Achievement of targeted operating cash flow for 2002 of a minimum of $95 million, from $12 million in 2001, represents a growth target that may prove difficult in the current economic environment.
SBA Communications Corp. B/Stable/-- Tsao With about $132 million in liquidity at the end of the first quarter of 2002, the company has the weakest financial risk profile among the major tower operators. With relatively slim cushion against execution risks, SBA is significantly dependent on the direction of tower-related spending by wireless carriers through the end of 2002.
SpectraSite Holdings Inc. CC/Watch Neg/-- Cosentino The rating was lowered and placed on CreditWatch on May 17, 2002, due to an announced debt tender offer to repurchase about 60% of its public debt at a substantial discount to current accreted value. SpectraSite recently announced that it was terminating the tender offer. With the termination of the exchange offer, the potential for a near-term bankruptcy filing by the company has materially increased. Although a significant amount of the company's debt is not currently cash-pay, its ability to eventually service such debt is highly uncertain, which may increasingly motivate management to restructure the company's balance sheet in bankruptcy.

Wireless
Wireless Companies Corp. Credit Rating /Outlook/ Comm. Paper Analyst Comment
AirGate PCS B-/Watch Neg/-- Tsao Due to strong competition and the reimplementation of a deposit for "Clear Pay" subscribers, the company lowered net subscriber additions for the second quarter of 2002 down by about 37% from initial guidance. The weaker-than-expected forecast could cause the company to violate the minimum subscriber covenant in the credit facility for its iPCS subsidiary. With about $115 million in liquidity at the end of the first quarter of 2002 and the company unlikely to generate free cash flow until 2004, it has very limited cushion against execution risks.
Alamosa Holdings LLC B-/Watch Neg/-- Tsao Due to strong competition and the reimplementation of a deposit for "Clear Pay" subscribers, the company lowered net subscriber additions for the second quarter of 2002 by between 30% and 50% from initial guidance. If the trend continues, there is a risk of violating the minimum subscriber bank covenant in the fourth quarter of 2002. With about $155 million in liquidity at the end of the first quarter of 2002, the company has very limited protection against execution risks.
American Cellular Corp. CCC-/Watch Neg/-- Kalinowski The rating was lowered on July 15, 2002, due to violation of the total debt leverage ratio bank covenant in the second quarter of 2002. Negotiations continue with the banks. As indicated in the 10-K and cited by management and the auditors, if this issue is not resolved with the banks, it raises the issue of the company's ability to continue as a going concern.
AT&T Wireless Services Inc. BBB/Stable/A-2 Kalinowski The company revised its guidance in March 2002 for the full year of 2002 to reflect the slowing economy, competitive pricing pressures, and the earlier completion of the TeleCorp PCS Inc. acquisition. Net customer additions grew at a minimal 3% rate in the first quarter of 2002 and are expected to improve in the second half of the year. The company's EBITDA margin improved in the first quarter of 2002 to about 23% due to cost controls and lower churn. Liquidity remains good with cash at $1.6 billion, an undrawn $2.5 billion bank credit facility, and an undrawn $1.2 billion accounts receivables securitization program.
Cellco Partnership (d/b/a Verizon Wireless) A+/Negative/A-1 Kalinowski Wireless net customer additions have been impacted by the economy and the reduction of subscribers in the reseller channel, which the company has been deemphasizing. Consequently, net customer additions grew by less than 1% in the first quarter of 2002 compared with the fourth quarter of 2001 at 186,000. The quality of the subscriber base, which totals 29.6 million, is good, with more than 90% under contract and postpaid churn at 2.0%. The company's EBITDA margin of 35% is about average for the industry and should improve further as digital migration is completed.
Centennial Communications Corp. B+/Negative/-- Cosentino Credit metrics are weak for the rating, with total debt to annualized EBITDA of 7.7x for the nine months ended February 2002, including the Jamaican wireless operations. However, the Jamaican wireless operations represent a 51%-owned venture, which has its own non-recourse funding arrangement with Lucent and is excluded from the company's bank loan financial covenant calculations. Profitability measures should remain under pressure in the next few quarters, reflecting start-up losses in the Dominican Republic. Domestic operations remain challenged by reduced roaming rates and competition.
Cingular Wireless LLC A+/Stable/A-1 Cosentino Cingular benefits from its affiliation with stronger parents SBC Communications Inc. and BellSouth Corp. It has grown its wireless base over the past year and has about 21.8 million customers. It had $2.8 billion of external debt as of March 31, 2002, and is expected to increase debt in 2002 to fund joint venture builds with AT&T Wireless Services Inc. and VoiceStream and its GSM network overlay plans for transitioning to 2.5 and third generation technology.
Dobson Communications Corp. B+/Stable/-- Kalinowski The rating was lowered in April 2002 due to higher debt leverage than previously anticipated and the heightened business risk profile of the rural cellular industry. These factors are partially offset by Dobson's roaming agreements with AT&T Wireless Services Inc. and Cingular Wireless LLC. In the first quarter of 2002, debt to EBITDA on an annualized basis was about 6.1x, and this is anticipated to be below 6.0x in 2002 due to net proceeds of about $300 million from property sales to Verizon Wireless.
Horizon PCS Inc. B-/Watch Neg/-- Tsao With liquidity of about $315 million at the end of the first quarter of 2002, Horizon has significantly more protection against execution risks than other Sprint affiliates. The company was able to amend its bank agreement on June 28, 2002, after violating the maximum EBITDA loss covenant in the first quarter of 2002.
Leap Wireless International Inc. B-/Watch Neg/-- Cosentino The rating was placed on CreditWatch on June 21, 2002, due to Standard & Poor's heightened concerns about the company's liquidity. Leap has had ongoing operating losses as it has built out its 40 domestic wireless markets and introduced services. Although the company has some availability under its vendor financing agreements, such financing may prove insufficient to fund anticipated operating losses if missteps in the business plan occur. Standard & Poor's will meet with management to review the company's business and financial plans for the 2002 to 2003 time frame before resolving the CreditWatch listing.
Nextel Communications Inc. B+/Negative/-- Tsao While the second quarter of 2002 results were strong, with solid net subscriber additions and steady operating metrics, significant leverage remains the primary concern. The rating is dependent on the company's ability to maintain solid quarterly execution and Standard & Poor's assessment of threats from competitors.
NII Holdings D/NM/-- Tsao The company filed for Chapter 11 in May 2002.
Nextel Partners Inc. B-/Stable/-- Tsao Nextel Partners is about 32% owned by Nextel Communications and operates in smaller markets adjacent to those served by Nextel Communications. Despite the weak economy, execution remained solid through the first quarter of 2002. Although the company is highly leveraged, with about $1.3 billion in debt, debt/pop and debt/subscriber have been on a declining trend since the second quarter of 2000. Current liquidity should provide adequate funding through 2003, absent any significant weakening of operations.
Rural Cellular Corp. B+/Stable/-- Kalinowski Operating performance has been adequate, but concerns exist regarding the sustainability of the company's high margin roaming revenue, which comprises 25% of total revenues, and its competitive position longer term. Increases in roaming minutes have been partially offset by the decline in roaming yield per minute. Debt to EBITDA has been declining, and this ratio was 6.4x for the first quarter of 2002. The company is generating modest positive free cash flow.
Triton PCS Inc. B+/Stable/-- Kalinowski The company continues to execute its business plan, primarily attributable to its high end, predominately postpaid customer base. Although net customer additions were on target in the first quarter of 2002 and are anticipated to be on target in the second quarter, the percent increase is lower than the quarterly net additions of 2001 due to the slowing economy and the higher penetration rate. EBITDA improvement is expected to continue in 2002.
UbiquiTel Inc. B-/Stable/-- Kalinowski The outlook was revised to stable from positive on July 26, 2002, due to slowing wireless fundamentals, the company's weak cash flow measures, and competitive challenges from national wireless service providers. EBITDA is not expected to turn positive until 2003. As of March 31, 2002, liquidity was comprised of $105 million cash and $85 million available under the bank credit facility, which should be sufficient to support funding needs until the company is free cash flow positive in 2004.
US Unwired Inc. B/Stable/-- Kalinowski The outlook was revised to stable on Feb. 11, 2002, following the company's announced acquisition of Georgia PCS, which was completed on March 11. The outlook revision was based on the slower growth prospects in the wireless industry and integration challenges from the IWO Holdings and Georgia PCS acquisitions. In addition, EBITDA coverage of interest expense is not anticipated to reach the 1x area until 2003.
Western Wireless Corp. B/Watch Neg/- Tsao The rating was recently lowered to reflect the increased potential for the company to violate its debt-to-operating cash flow bank covenant in the near term and other covenants in 2003 as they become more restrictive. The company experienced two sequential quarters of disappointing net subscriber additions, ARPU, churn, and EBITDA. Resolution of the CreditWatch listing is dependent on resolution of the covenant issue.

Wireline
Wireline Companies Corp. Credit Rating /Outlook/ Comm. Paper Analyst Comment
Alaska Communications Systems Group Inc. BB/Watch Neg/-- Cosentino The rating was placed on CreditWatch negative on July 31, 2002, due to expectations that the company will not be able to achieve a low-4x debt-to-EBITDA ratio in the near term. Standard & Poor's will meet with management to review the company's plans and will assess the effects of the business, economic, and competitive environment on the company's prospective financial profile to resolve the CreditWatch listing.
D&E Communications Inc. B+/Positive/-- Tsao The company added more than 80,000 rural access lines to a total of about 147,000 access lines after completing the acquisition of Conestoga Enterprises in late May 2002. Although D&E's rural incumbent business is stable, its financial profile could be negative impacted by its plan to continue expanding the CLEC business and longer-term competition from cable modem services.
FairPoint Communications Inc. B+/Negative/-- Tsao After selling the assets of its problematic CLEC business in late 2001, the company finally resolved the issue of a $126 million credit facility extended to the CLEC. Lenders agreed to convert about $94 million of the facility to preferred stocks and the remainder into a new term loan due in 2007. Despite solid operations in its core RLEC business, the negative outlook reflects Fairpoint's continued aggressive acquisition strategy.
Madison River Telephone Company LLC B/Stable/-- Cosentino The LEC is very stable, and operating margins now exceed 50%. CLEC losses have narrowed considerably, and should not be much of a cash flow drag in 2002. As of March 31, 2002, EBITDA interest coverage totaled 1.3x and total debt to annualized EBITDA was 8.0x.
Valor Telecommunications LLC B+/Stable/-- Cosentino Valor benefits from its decision in early 2002 to discontinue its CLEC operations. Yet the company is still highly leveraged, with debt to EBITDA expected to be about 6.5x for 2002.




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