NEW YORK-Moody’s Investors Service, New York, announced Feb. 27 it lowered its ratings on $489 million of Cincinnati Bell Inc. debt after conducting a two-month review.
Moody’s said it lowered by three notches, to Baa2 from A2, its investment grade rating of Cincinnati Bell’s long-term debt, and to Prime-2 from Prime-1 its short-term commercial paper rating. The rating agency also said it reduced by two levels, to A2 from Aa3, its rating on the senior unsecured long-term debt of the Cincinnati Bell Telephone Co. subsidiary.
“These actions reflect Moody’s expectation that the company’s financial performance will be impacted negatively over the intermediate term by the financial requirements associated with its strategy to expand its non-regulated businesses as competition in the telecommunications markets continues to intensify,” said Stephen J. Gutkowski, senior vice president, and Alfred J. Pastore, managing director, of the agency’s Telecommunications and Media Group.
Moody’s undertook its review in December, shortly after Cincinnati Bell Inc. announced it would purchase Transtech, the Solutions Customer Care unit of AT&T Corp. for $625 million in cash.
Transtech’s approximately $400 million in annual revenues, two-thirds of which come from AT&T, are twice the size of Cincinnati Bell’s Matrixx Marketing affiliate. The definitive agreement for the Transtech acquisition includes an eight-year contract under which AT&T guarantees Matrixx specific revenues for the first three years. AT&T also agreed to give Matrixx a bidding preference for any new telecommunications-related services the carrier outsources throughout the life of the contract.
“Transtech’s reliance on AT&T for the significant portion of its sales will increase the percentage of Matrixx’s revenues concentrated at its top three customers to approximately 60 percent, up from 39 percent at the end of the third quarter of 1997,” Gutkowski and Pastore said.
“Past operational difficulties at Matrixx have resulted in the restructuring of its teleservices operations, for which the company recognized an after-tax charge of $35 million in 1997.”
Additionally, Moody’s noted that Cincinnati Bell also is using $100 million in cash to finance a separate agreement with AT&T. Cincinnati Bell Wireless will buy an 80-percent interest from AT&T Wireless Services Inc. in a new personal communications services network that expects to launch commercial service later this year in the Ohio markets of Cincinnati and Dayton. Cincinnati Bell Inc. expects the joint venture to be cash flow positive in the next three-to-four years.
However, the Moody’s analysts said, “the intent of CBI’s management to finance both the Transtech acquisition and the PCS wireless joint venture with cash will significantly limit the company’s financial flexibility and result in higher leverage and reduced (debt) coverage ratios.
“In addition to the ratings pressure associated with the parent company’s acquisition appetite, competition in Cincinnati Bell Telephone Co.’s territory is expected to intensify.”
