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Rating Action: Moody's assigns B3 CFR to Brightspeed with stable outlook
19 Sep 2022
Approximately $6.9 billion in rated securities affected
New York, September 19, 2022 -- Moody's Investors Service (Moody's) today assigned a first-time B3 corporate family rating (CFR) and a B3-PD probability of default rating (PDR) to Connect Holding II LLC, doing business as Brightspeed. Moody's has also assigned a B2 rating to the company's proposed $1.9 billion senior secured notes due 2029 and $3.6 billion senior secured credit facilities. The proceeds from the proposed senior secured notes and the credit facility, together with approximately $1.2 billion equity contribution and a $1.9 billion Holdco loan (unrated) will be used to fund the acquisition of Brightspeed by funds affiliated with Apollo Global Management, Inc. (Apollo) from Lumen Technologies, Inc.'s (Lumen, Ba3 stable) for $7.5 billion. In addition to the purchase price, fees and expenses, the transaction proceeds will fund approximately $1.5 billion cash to the balance sheet to prefund upcoming capital expenditures.
In connection with the acquisition, Embarq Corporation (Embarq) will become a subsidiary of Brightspeed, and the Embarq's existing $1.44 billion senior unsecured notes, due 2036, will remain outstanding post acquisition. In today's rating action, Moody's downgraded Embarq's senior unsecured notes to Caa2 from Ba2. The rating outlooks at Brightspeed and Embarq are stable.
Brightspeed is a new independent entity formed as a carveout of Lumen's incumbent local exchange carrier (ILEC) business, including its consumer, small business, wholesale and mostly copper-served enterprise customers and assets, across a 20-state footprint.
Brightspeed's credit profile is constrained by the company's aggressive growth strategy that Moody's expects will result in several years of negative free cash flows and financial leverage increasing to around 8x by the end of 2023 on a Moody's adjusted basis (including Holdco notes in Moody's debt calculations). Governance considerations are a key driver of today's rating actions.
The downgrade of Embarq's senior unsecured notes to Caa2 reflects their subordination to the proposed secured debt at Brightspeed post acquisition. The Embarq notes will not be guaranteed by Brightspeed, the issuer of the proposed secured debt, nor by any of the subsidiaries that guarantee the proposed senior secured notes and the credit facilities. The multi-notch downgrade also reflects the weaker credit profile of Embarq's new parent Brightspeed (as reflected in its B3 CFR) relative to the Ba3 CFR of its pre-acquisition parent, Lumen.