S&P Bullish on Integra, Sour on One Communications

Standard & Poor’s Ratings Services has its eye on the CLEC market this week, improving its view of one West Coast provider and downgrading its opinion of an East Coast counterpart.

First, the positive news. S&P raised Integra Telecom’s corporate credit rating after the Portland-based CLEC raised $785 million in debt financing – $15 million more than it had planned. Integra now holds a B- rating, up from CCC+, and has been removed from S&P’s CreditWatch with positive implications. Part of the reason is the money Integra has secured comes in the form of a $250 million term loan with looser covenants than the previous bank agreement. If Integra hadn’t received different terms, S&P analysts feared the company would have had a hard time with the old ones. This time, though, the contract provides a more positive “minimum ongoing cushion of 15 percent,” said credit analyst Catherine Cosentino.

For One Communications, headquartered in Massachusetts, however, the news isn’t as good. S&P this week downgraded the CLEC to B- from B and placed it on CreditWatch with negative implications. That’s because One Communications is in a legal fight with Verizon Communications Inc. (VZ) over access charges, and, said S&P, continues to show deteriorating operational and financial performance.

The access charges lawsuit stems from the Choice One Communications days, before Choice One, Conversent and CTC Communications all merged to create One Communications. The dispute involves access charges billed by Choice Communications from April 2003 to September 2005, credit analyst Allyn Arden said. He added that if One Communications loses the case, the company would trigger a default if damages exceed $7.5 million.

On top of that possibility, One Communications lost 11 percent in revenue in 2009’s fourth quarter, Arden said. One Communications has yet to file its audited 2009 financial statements – and has received bank waivers regarding that delay – so the full year’s results are not known. But One Communications did see what Arden called “elevated churn” among SMB customers as the weak economy led to shutdowns. One Communications also faces intense competitive pressure, Arden said.

One Communications competes against the likes of Verizon and PAETEC (PAET).

And over the longer term, One Communications’ liquidity could be hurt when its bank credit facility covenants become significantly more strict on March 31, 2011, Arden pointed out.

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