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TEXT-S&P: GCI ratings unaffected by joint venture deal
June 5, 2012 / 5:02 PM / 5 years ago

TEXT-S&P: GCI ratings unaffected by joint venture deal

 (The following statement was released by the rating agency)	
 June 5 - Standard & Poor's Ratings Services said today that Anchorage-based
diversified telecommunications provider GCI Inc.'s definitive agreement to
combine its wireless business with Alaska Communications Systems Group 
(ACS) in a joint venture does not have an immediate impact on our 'BB-'
corporate credit rating on GCI. However, we do view the proposed transaction as
modestly negative for GCI in that it adds risk to the company's future cash flow
generation from the wireless business, based on the priority of distributions in
the first four years. Under the agreement, the two companies will contribute
their respective wireless assets, including spectrum licenses, cell sites, and
backhaul facilities, to the partnership. GCI will purchase $100 million of ACS'
wireless assets and contribute them to the joint venture, which it will operate.
As a result, GCI will own two-thirds of the business.	
	
We estimate pro forma debt to EBITDA is about 4.6x for GCI, comparable to the 	
company's leverage prior to the transaction. Our leverage calculation includes 	
the EBITDA from GCI's businesses outside the joint venture as well as the 	
EBITDA contribution from the wireless partnership, less the preferential cash 	
distribution to ACS, which will be about $50 million per year for the first 	
two years of operations and $45 million in the next two years, subject to 	
certain penalties based on customer losses. Our pro forma calculation also 	
includes $100 million of new debt that GCI plans to issue at the parent to 	
fund the payment to ACS.	
	
Although leverage would be relatively unchanged under this calculation, we 	
believe GCI is taking on a greater risk of declining cash flow over the next 	
several years. We would expect the joint venture to lose a substantial amount 	
of roaming revenue that ACS currently receives from Verizon beginning in 	
mid-2013, when we expect Verizon to enter the Alaskan wireless market. GCI 	
would receive a lower initial proportion of distributions from the joint 	
venture and we believe that free operating cash flow (EBITDA less capital 	
expenditures) could decline over the next few years, resulting in lower 	
distributions to GCI given the preferential fixed payments to ACS. These 	
factors could cause us to revise our financial risk profile, which we 	
currently view as "aggressive."  	
	
We will evaluate issue-level and recovery ratings when the company refinances 	
its current credit facility, which we expect will be done prior to transaction 	
close. (For more information, see "Alaska Communications Systems Group Inc. 	
'B+' Corporate Credit Rating Affirmed On Announced Joint Venture With GCI 	
Inc.," published earlier today on RatingsDirect.)      	
	
 (New York Ratings Team)	
 

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