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Rating Action: Moody's affirms Conterra's ratings on term loan upsize and amendment; outlook stableGlobal Credit Research - 24 Jan 2022Approximately $415 million in rated debt securities affectedNew York, January 24, 2022 -- Moody's Investors Service ("Moody's") affirmed Conterra Ultra Broadband Holdings, Inc.'s (Conterra) ratings, including the B3 corporate family rating (CFR) and the B2 rating on the company's upsized first lien credit facility. The outlook is stable.The affirmation of the ratings follows the company's announcement on 24 January 2022 [1] that it plans to upsize its existing first lien term loan by $55 million and amend its credit agreement to reset the springing first lien leverage covenant to 6x through its maturity. Conterra plans to use the proceeds from the debt raise to repay revolver borrowing, add cash to the balance sheet to fund investments and pay fees and expenses. The transaction is expected to close in February 2022.The affirmation of the rating reflects Moody's view that Conterra will maintain adequate liquidity and after a temporary period of negative free cash flows and elevated leverage because of project-related capex, it will return to leverage of low-6x (Moody's adjusted) by the end of 2023 and break-even free cash flows in early 2024.Affirmations:..Issuer: Conterra Ultra Broadband Holdings, Inc..... Corporate Family Rating, Affirmed B3.... Probability of Default Rating, Affirmed B3-PD....Senior Secured Revolving Credit Facility, Affirmed B2 (LGD3)....Senior Secured 1st Lien Term Loan B, Affirmed B2 (LGD3)....Senior Secured 2nd Lien Term Loan, Affirmed Caa2 (LGD6 from LGD5)Outlook Actions:..Issuer: Conterra Ultra Broadband Holdings, Inc.....Outlook, Remains StableRATINGS RATIONALEConterra's B3 CFR continues to reflect its small scale, regional coverage with limited market share of broadband services in its markets and a managed decline in its fixed wireless business. Conterra's financial leverage is high and will increase further pro forma for the term loan upsize, from 5.9x Debt/EBITDA at FY2020 to about 6.5x pro forma (both metrics are Moody's-adjusted). Free cash flow was modest, at roughly 1.6% of Moody's-adjusted debt in FY2020. Moody's expects that Conterra will continue generating solid cash flows from operations in the next 12-18 months but nevertheless its free cash flow will be negative due to very high growth and strategic capex in 2022-23 as the company continues to expand its network. Conterra's competitive environment includes large telecom and cable operators which provide comparable services to commercial and enterprise customers.Conterra's credit profile garners support from a stable base of contracted recurring revenues, long-term take-or-pay contracts, robust and growing data demand for bandwidth and fiber infrastructure, and the very strong EBITDA margins exceeding 50% (including Moody's standard adjustments). Conterra also has a good customer base with a large and diverse set of high-quality organizations including commercial enterprises, national wireless carriers and school districts that are majority funded by the FCC E-rate program. Conterra's high-grade, mostly owned, fiber network with high capacity and speeds enables it to capture its fair share of the strong broadband demand in its attractive tier II and III markets.Conterra has adequate liquidity, supported by its lack of near-term debt maturities and constrained by high growth capex spending that is expected to run as high as 73% of revenue in 2022, reliance on revolver borrowing to fund growth, and Moody's expectation of negative free cash flow over the next 18 months. For its external liquidity needs, Conterra relies on its $50 million secured revolving credit facility, which is rather small given the company's high capex. The revolver matures in April 2024 and has a springing first lien net leverage covenant that is triggered at 30% utilization. The proposed amendment will reset the springing covenant to 6x through its maturity in April 2024, without further step-downs. Conterra's first lien net leverage covenant ratio was 4.28x for LTM 9/2021, yielding a 24% cushion over the requirement. Despite a proposed covenant reset to 6x, the projected headroom over the requirement will decline materially. Proforma for the proposed term loan upsize and assuming that Conterra will rely on available cash and revolver borrowing to fund a significant project with a multi-year payback period, Moody's projects covenant cushion to decline to the 10%-15% range by the end of 2022.Conterra's debt instrument ratings reflect the probability of default of the company, as reflected in the B3-PD probability of default rating, an average expected family recovery rate of 50% at default given the mix of first and second lien secured debt in the capital structure and the particular instruments' ranking in the capital structure. The first lien credit facilities, including the $50 million revolver due April 2024 and the upsized $305 million ($299 million outstanding at close) term loan due April 2026, are rated B2, one notch above the CFR, reflecting loss absorption in a distress scenario from the 2nd lien secured facility ($65 million due April 2027). The first lien senior secured credit facility is collateralized by substantially all assets with upstream guarantees from direct and indirect domestic subsidiaries, and downstream guarantees from its parent. The second lien senior secured term loan is rated Caa2, two notches below the CFR given the significant subordination to the first lien senior secured credit facility.The stable outlook reflects Moody's expectations that Conterra will operate with high leverage of around 6.5x (Moody's adjusted) over the next 12-18 months as the company deploys its cash, proceeds from the debt raise, free cash flow and available credit facilities to fund growth. While this is a high level of leverage, the stable outlook reflects Moody's views that Conterra will continue to grow its earnings and maintain adequate liquidity.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSGiven the company's scale, an upgrade of the ratings is unlikely over the next 12-18 months. Moody's could upgrade Conterra's ratings over time if the company improves its scale and business diversity, sustains leverage (Moody's adjusted debt/EBITDA) below 5.5x, and commits to a financial policy supporting operating at such leverage level. Maintaining good liquidity and sustaining FCF/debt above 5% (Moody's adjusted) will also be required for an upgrade.A downgrade of the ratings could arise if Conterra fails to maintain adequate liquidity or if its Moody's adjusted debt/EBITDA approaches 7x. A downgrade could also arise if free cash flows remain negative in conjunction with a slowdown in EBITDA growth or less than expected success in new bookings or recurring revenue growth.The principal methodology used in these ratings was Communications Infrastructure Methodology published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1285583. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Conterra is an independent provider of fiberbased services, operating approximately 13,000 fiber route miles predominantly in Tier II and Tier III markets across the 21 states in the Southeast, South Central and Western US. The company delivers dedicated and custom networks, ethernet and internet, dark fiber, and voice services. Conterra is majority owned by Fiera Infrastructure and APG Group NV.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Conterra's announcement posted on LCD, 24-Jan-2022Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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