RCN Telecom Services has a number of attractive features incorporated into its business model, but there are also risks involved, in part because it operates under the shadow of much bigger entities operating in the same space.
Despite a relative high leverage anchor of 6.3x, it carries a Moody’s Investors Service Corporate Family rating of B2.
There’s another despite: The CFR remains at that level despite the fact that a proposal to raise $100M via a bond issue is rated only Caa1. The reason for the bond is one we don’t often see – it’s for a dividend distribution to its primary owners, private equity firms ABRY Partners, LLC and Spectrum Equity.
Moody’s believes that RCN’s MO – offering attractive three-way service including video, internet and VoIP in densely populated urban areas – positions it well to generate free cash flow and pay down debt.
Further, it was known that distributions were going to be made beforehand and that was factored into Moody’s B2 rating.
Nevertheless, challenges lie ahead for RCN. Moody’s analyst Karen Berckmann said, “the sheer number of competitors, most with greater scale and financial flexibility, will still make it difficult for RCN to win and retain customers. Also, the financial sponsor ownership constrains the rating; notwithstanding expectations for leverage to decline from both EBITDA growth and debt reduction over at least the next year, beyond that time the equity owners will likely seek incremental returns of capital, which could lead to an increase in leverage or limit the application of free cash flow to debt reduction.”
RCN’s big market strategy has it operating in only five markets, but they are attractive ones: New York, Chicago, Philadelphia, Washington DC and Boston.