Fitch Affirms Cincinnati Bell's IDR at 'B'; Assigns Stable Outlook
CHICAGO -- January 25, 2013
Fitch Ratings has affirmed Cincinnati Bell Inc.'s (CBB) 'B' Issuer Default
Rating (IDR) and the ratings assigned to its related securities. The ratings
have been removed from Rating Watch Evolving, and a Stable Rating Outlook has
been assigned. In addition, Fitch has assigned a 'BB/RR1' rating to CBB's $200
million senior secured revolving credit facility due 2017. A full list of
ratings is shown below.
Fitch had placed the ratings on Rating Watch Evolving in February 2012 when
CBB stated it would evaluate alternatives for its data center business. The
Rating Watch Evolving reflected uncertainty at that time regarding CBB's
credit profile following the conclusion of its strategic evaluation. The
company's options implied a wide range of potential capital structure
outcomes, including the potential delevering of the communications business.
On Jan. 18, 2013, a partial IPO of CyrusOne, Inc. (CyrusOne) was completed,
with CyrusOne raising approximately $360 million in proceeds (before fees and
expenses) to fund its growth initiatives. In late 2012, CyrusOne had repaid
approximately $480 million of intercompany debt (through its own note
offering) owed to CBB, which in turn used the proceeds to reduce external
--Expectations for the company's wireline and wireless businesses on a
stand-alone basis and excludes the operations or debt associated with its
partially owned data center business;
--The communications business is expected to have relatively high, albeit
stable leverage at 5.2x in 2013;;
--Fitch's expectations reflect modest, $50 million debt reductions in 2014 and
2015 arising from monetizations of CyrusOne although should these
monetizations not occur, Fitch believes the company has the financial
flexibility to maintain stable leverage, in the absence of returns of cash to
Following the partial spin-off of the data center business, Cincinnati Bell's
remaining wireline and wireless businesses have growth prospects that are
relatively weak. The company appears to be managing through the competitive
pressures on its wireline business through the expansion of its
facilities-based video and internet services business. However, the
competitive profile of its wireless business is weak relative to the national
operators, and CBB has been losing wireless subscribers over the last several
quarters. Historically, CBB's wireline and wireless businesses had been a
source of cash for the data center business, but now that CyrusOne is
self-financing, CBB may be able to reinvest in the communications business at
higher levels, rather than being a source of cash for the data business.
Pro forma for debt reductions completed in late 2012 using proceeds from the
intercompany note repayment, CBB's debt on Sept. 30, 2012, totaled
approximately $2.14 billion, down nearly $400 million from $2.53 billion on
Dec. 31, 2011. At Sept 30, 2012, the company did not have any debt outstanding
on its then outstanding $210 million secured revolving credit facility. The
company had approximately $30 million available on the $105 million account
receivable securitization facility, after taking into account the drawn amount
and letters of credit.
On Nov. 20, 2012, CBB entered into a new $200 million senior secured revolving
credit facility maturing in July 2017. The original commitments on the
revolver will be reduced by the lesser of the net cash proceeds from the first
sale of equity interests in CyrusOne Inc. or CyrusOne LP to occur after the
IPO of CyrusOne and $50 million, provided that such sale occurs by Dec. 31,
2014. If such a sale has not occurred by that date, the commitments will be
permanently reduced to $150 million on Dec. 31, 2014 and to $125 million on
Dec. 31, 2015. Proceeds from CyrusOne equity sales shall be used to prepay
outstandings against the revolver first, and second, other prepayable debt
(contributions to underfunded pension plans shall be considered debt
The principal financial covenant in the revolving credit facility calls for
maximum total leverage of 7.25x on Dec. 31, 2013, which steps down annually
until it reaches 5.25x on Dec. 31, 2016 and 4.25x on March 31, 2017 and
CBB does not have any material maturities until the $500 million of senior
unsecured notes are due in 2017. The notes are callable beginning in late
2013, and Fitch believes the notes could be targeted for reduction over time
as the CyrusOne stake is monetized.
CyrusOne was released from the guarantees on CBB's unsecured long-term debt on
Nov. 20, 2012 under the new credit agreement as well as under the indentures
for its 2017, 2018, and 2020 notes. CBB is restricted by its bank covenants
from providing support to CyrusOne. Under Fitch's parent/subsidiary linkage
criteria, Fitch believes there is no longer a parent-subsidiary relationship
and that the entities should be rated on a stand-alone basis (Fitch does not
rate CyrusOne). Over time, CBB intends to monetize its current 69% stake in
CyrusOne and delever, although the timing is unknown.
For 2013, although will CBB no longer invest in the data center business,
remaining debt service costs and expected pension contributions will keep
normalized free cash flow at modest levels. .
Considerations for a Negative Rating Outlook include, but are not limited to,
deterioration in leverage to greater than 5.5x through pressure on operations,
the effect of shareholder initiatives, or acquisitions.
Considerations for a Positive Outlook include a reduction in leverage to the
4.5x mark and with expectations that the lower leverage will be sustained.
Fitch has taken the following rating actions:
Cincinnati Bell, Inc. (CBB)
--IDR affirmed at 'B';
--$40 million senior secured notes affirmed at 'BB/RR1';
--$500 million senior unsecured notes due 2017 affirmed at 'B+/RR3';
--$684 million senior unsecured notes due 2020 affirmed at 'B+/RR3';
--$625 million senior subordinated notes affirmed at 'CCC+/RR6';
--$129 million convertible preferred stock affirmed at 'CCC+/RR6';
--$200 million senior secured revolving credit facility due 2017 assigned
--$210 million senior secured revolving credit facility due 2014 'BB/RR1'
--$250 million senior unsecured notes due 2015 'B+/RR3'withdrawn.
Cincinnati Bell Telephone (CBT)
--IDR affirmed at 'B';
--$150 million senior unsecured notes due 2028 affirmed at 'BB/RR1';
--Various medium term notes due in 2023 'BB/RR1' withdrawn.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
investors. The issuer did not participate in the rating process other than
through the medium of its public disclosure.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Telecom Companies
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John Culver, CFA
70 W. Madison Street
Chicago, IL 60602
Brian Bertsch, +1-212-908-0549 (New York)
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