Moody’s downgrades Liberty Cablevision of Puerto Rico to ‘B3’
Moody’s Investors Service announced Tuesday its decision to downgraded the corporate family rating of Liberty Cablevision of Puerto Rico LLC, specifically the part of the business related to OneLink, to B3 and its probability of default rating to B3-PD, concluding the review for downgrade initiated May 9.
The outlook is now negative, incorporating the “deterioration of the liquidity profile, weaker than anticipated credit metrics, and lack of clarity in financial reporting, recognizing the company is in compliance with all financial reporting covenants for its credit agreement,” Moody’s said.
The agency took the following actions: downgraded the company’s Corporate Family Rating to “B3” from “B2”; downgraded the probability of default rating to “B3-PD” from “B2-PD”; downgraded the senior secured first lien credit facility to “B2” from “B1”; downgraded the senior secured second lien credit facility to “Caa2” from “Caa1”; and changed its outlook to “negative” from “rating under review.
In its analysis, Moody’s backtracked to November 2012, when Searchlight Capital Partners and Liberty Global Inc. acquired San Juan Cable Holdings, LLC, which operates as OneLink from its existing owners. Simultaneously, Liberty Global, the parent of Liberty Cable Puerto Rico, merged the two local cable providers, with Liberty retaining control through its 60 percent ownership and Searchlight owning the remaining 40 percent.
In May, Liberty Global disclosed the discovery that materially misstated financial information was provided to lenders relating to financial periods prior to the merger, constituting a technical default, the credit ratings agency said.
“Lenders agreed to waive this default, and the company paid a modest fee of just under $1 million to execute the waiver,” Moody’s noted.
Liberty Cable Puerto Rico reported a thin cushion of compliance under its bank financial covenants for the first quarter of 2013, and the current leverage would likely prevent incremental borrowings under the $25 million revolver.
“The limited revolver access and cash balance of approximately $5 million as of March 31 afford Liberty Cable Puerto Rico with minimal margin of error as it integrates the companies while also facing intense competition and weak economic conditions in Puerto Rico,” Moody’s said. “The tight cushion raises the risk of risk of a breach, though the credit facility does permit an equity cure and Moody’s believes the owners likely to contribute cash to facilitate compliance if necessary.”
In its analysis, Moody’s made reference to a $10 million shareholder loan granted at the end of 2012 by another Liberty subsidiary, LGI Broadband Operations, used to pay down revolver borrowings.
However, this debt does not factor into leverage calculations for covenant compliance, and the cash boosted short term liquidity, Moody’s said, adding that the incremental debt elevates overall leverage and adds interest expense, weakening the credit profile.
Using the pro forma financial information available for 2012, Moody’s estimates leverage at approximately seven times debt-to-EBITDA before expected synergies, higher than previously expected pro forma leverage in the low six times range.
“Based on available information, it appears that the weaker EBITDA results primarily from the restatement of historical San Juan Cable financials, and management has not revised its forecast for the combined entity,” Moody’s said. “However, the limited information reduces Moody’s ability to monitor trends and performance, raising the risk of negative surprises.”
Still, Moody’s acknowledged that the combination of the two cable operators will “yield revenue and cost synergies and enhance the entity’s competitive position. Furthermore, the 60 percent ownership and implicit backing from Liberty Global continues to support the rating.”
The negative outlook incorporates concerns over the liquidity profile, and any further deterioration could warrant a downgrade, Moody’s warned.
The combined companies have a footprint that cover some 700,000 homes in Puerto Rico and have annual revenue of approximately $300 million.