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PAETEC Seeks New $225 Million Loan

PAETEC Holding Corp., one of the nations largest competitive local exchange carriers, revealed this week that it plans to borrow $225 million to replace its existing credit facilities.

In a filing with the Securities and Exchange Commission, PAETEC said the new debt it is seeking will consist of a five-year senior secured revolving credit facility for $125 million and a seven-year facility for $100 million.

Fairport, N.Y.-based PAETEC said it will use the proceeds for general corporate purposes, including repayment of the $25 million principal amount of borrowings outstanding under the Companys existing senior secured revolving credit facility and to complete the recently announced acquisition of XETA Technologies, Inc, the closing of which is subject to customary closing conditions.” In a transaction valued at roughly $61 million, or $5.50 per share, PAETEC is purchasing Broken Arrow, Okla.-based XETA, a company that sells, installs and services advanced communications technologies for enterprise customers.

PAETEC noted it expects to close on the new credit facilities in the second quarter of 2011.

Through PAETECs acquisition last December of Cavalier Telephone, the company will become the largest CLEC in the United States based on operating scale, according to Moodys Investors Service, the debt ratings agency. PAETEC reported 2010 revenues of $1.624 billion and served roughly 54,000 business customers as of March 1, 2011.

In a ratings action this week, Moodys affirmed PAETEC’s existing ratings, including a B2 corporate family rating,” and added that the rating outlook remains negative. Moodys defines a corporate family rating as a corporate familys ability to honor all of its financial obligations.” The company considers obligations rated B to be speculative” and subject to high credit risk.” Moody’s assigned Ba3 ratings to PAETEC’s proposed credit facilities.

Moody’s peer Standard & Poor’s this week also affirmed its ‘B’ corporate credit rating on PAETEC with an outlook of stable. Meanwhile, S&P assigned a ‘B’ issue-level rating and ‘3’ recovery rating to PAETEC’s proposed $225 million credit facilities.

“The ‘3’ recovery rating indicates our expectation for meaningful (50-70 percent) recovery in the event of default,” the ratings agency stated in a note Monday.

S&P said PAETEC’s total debt outstanding, pro forma for the credit facilities transaction, will be roughly $1.55 billion.  

In a note Monday, Moodys said it may revisit PAETECs ratings and/or ratings outlook if competitive and regulatory dynamics lead to a greater degree of stability in the competitive telecommunications industry that could be driven by continuing consolidation.”

As a result, we will look for signs of firmness in pricing terms, improving financial metrics, solid liquidity position, stability of cash flows, diminishing capital expenditures and growth through prudent acquisitions,” Moodys added.

Shares of PAETEC closed Thursday at $3.67. The stock has ranged in price between a 52-week high of $5.30 (April 29, 2010) and a 52-week low of $3.00 (March 23, 2011).


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