[Moody's rates Pacific Gateway Exchange]
Approximately $328 Million of Debt Securities Affected.
NEW YORK, Jan 26 - Moody's Investors Service assigned a B1 rating to the committed $30 million credit facility of Pacific Gateway Exchange, Inc. and the $70 million credit facility Pacific Gateway Exchange (Bermuda) Limited (the "Foreign Borrower").
A B3 rating was assigned to Pacific Gateway Exchange, Inc.'s proposed $228 million of senior notes (with a 2-year interest escrow), due in 2010.
Pacific Gateway Exchange, Inc. (PGE) is a parent holding company.
Moody's has also assigned a senior implied rating of B2 and a senior unsecured issuer rating of B3 to the company. The outlook is stable.
This is the first time that Moody's has assigned ratings to these entities.
The ratings reflect the challenge of migrating from the wholesale carriers-carrier model to a diversified telecommunications service provider, the intense competition from large US long distance carriers and PTTs in their international territories as the company enters the retail international telecommunications market, an uncertain regulatory environment in each of the company's targeted international markets, and the need to generate substantial growth to service debt.
Offsetting these risks are the company's initial successes in developing its retail business plan, the development of an extensive network infrastructure, a currently strong capital structure, and that the company is presently generating cash flow (EBITDA).
The B1 rating on the $100 million of credit facilities reflects the benefit that the facilities will be secured by virtually all of the borrowers' assets, with upstream guarantees from all their subsidiaries.
The B3 rating on the senior notes reflects its structural subordination to all current and future secured senior debt, such as a credit facility of up to $100 million and vendor financing for up to $60 million.
The ratings, however, also recognizes that in the event of default, tangible collateral coverage would likely be sufficient to cover the total outstanding commitments under both the credit facility and the senior notes.
The proceeds from the senior notes offering will be used to refinance the existing debt, fund interest escrow of an estimated $53 million, and for commitments on two undersea fiber optic cable systems in addition to working capital needs. Upon the completion of the senior notes offering, PGE's credit facility will be eliminated and the credit facility issued by the Foreign Borrower will be reduced to $50 million.
The credit facility will be undrawn. Pacific Gateway Exchange, Inc. is a diversified global, facilities-based telecommunications company providing wholesale and retail telecommunications services, bandwidth services and Internet services.
To date, the company has been able to establish a strong presence in the wholesale market, with approximately 90% of the company's revenues derived from the sale of wholesale services to other carriers in the U.S.
However, as also experienced by other wholesale providers, PGE is facing pricing pressures and decreasing wholesale gross margins.
To compliment its product offering, leverage its network infrastructure and capitalize on higher margin opportunities, the company intends to increase its retail presence by providing international, facilities-based long distance services, primarily to ethnic residential customers in North America and selected markets within Europe and the Asia-Pacific region.
Moody's believes that PGE's ability to achieve retail sales of approximately 8% of revenues in just 18 months and its recent acquisitions of retail customers and support systems, most notably the $40 million acquisition of the international division of NOS Communication Inc. represents tangible progress and a good foundation for building its retail presence.
However, as the company continues to develop this business segment, there will continue to be significant investments necessary to establish the support systems, sales infrastructure, and marketing programs necessary to develop a retail franchise.
Furthermore, the international, long-distance market is becoming more competitive. Moody's expects that pricing advantages will become less meaningful within the next two-to-three years and operators will be required to compete on differentiating factors other than price, such as service and product offerings, making the industry even more competitive.
In addition, PGE's success will, in part, depend on the international regulatory environment and the continued deregulation of the international markets.
To date, PGE has established 44 operating agreements in 28 countries and 7 international operating licenses.
The company presently operates switching and international gateway facilities in New York, Los Angeles, Dallas, the United Kingdom, Germany, Russia, Japan, Australia, and New Zealand.
The company is building an extensive and capacity-rich network infrastructure. Upon completion of its build-out, PGE will have ownership in 32 undersea fiber optic cable systems in the Atlantic, Pacific and Caribbean regions.
Two of these cables, Japan-US and TAT-14 are being funded through this transaction and should be operational by the end of 2000. To offset the cost of its network, the company is using capacity sales as an additional source of capital.
PGE's planned infrastructure build in Japan should also improve its cost structure, as this backhaul network is being built through a joint venture with KDD Submarine Cable Systems. Upon completion of this transaction, PGE will have total debt of $228 million and net book equity of $117.0 million.
This will result in a pro forma debt-to-book capitalization ratio of 66.1%, which suggests a degree of balance between debt and equity financing relative to other telecom operations at this stage of development.
For the year ending 1999, EBITDA was approximately $37 million, covering interest by 1.2x. Moody's expects EBITDA to continue to improve, although the absorption of costs to expand operating infrastructure will put pressure on performance near-term. |
