The ratings outlook is negative.
This action concludes the review for downgrade initiated on 28 August 2012.
"The rating confirmation considers the likely covenant breach in 4Q2012 under Pacnet's current bank facilities will not result in an Event of Default, nor will it cause an acceleration of Pacnet's outstanding term loan," says Annalisa DiChiara, a Moody's Vice President and Senior Analyst.
Based on Moody's expectations, the company's cash on hand of US$85 million at 31 October 2012 will be sufficient to fund operations (including debt service) over the next 12-18 months depending on the amount of total capex outflows. Without a significant expansion of EBITDA, the company will remain reliant on this existing cash to fund its operations and additional bank funding to support growth capex, including new build out additional data center.
"The negative outlook reflects our expectation that Pacnet's operating metrics will remain weak over the next 12 months at a time when it will also have to manage substantial execution risk associated with the expected roll out of a data center in Singapore. Its debt servicing obligations and capex will continue to exceed operating cash flow resulting in an erosion of the company's cash position through to at least the end of 2013," added DiChiara.
In mid-October, the company announced a major restructuring program, including a reduction in headcount of 30% and the elimination of lower margin businesses such as wholesale voice. These measures are expected to generate annual savings of approximately US$20 million, boosting profitability over the next 12 months. However, Pacnet's EBITDA in 4Q 2012 will be severely negatively impacted by a one-off cash charge of US$6-$7 million related to this restructuring.
As a result, Moody's expects the company's EBITDA in 4Q 2012 to be between US$12-14 million, as compared to our original expectation of US$18 million. This will result in debt/ebitda of 4.5x which could cause a covenant breach under the company's term loan facility unless it obtains a waiver from its banks.
While we view the business restructuring positively, we remain cautious over Pacnet's ability to execute on its other stated business objectives, notably its expansion in China and targeted increase in data center related revenues. Successful and timely execution of these plans is critical to the company's longer-term viability.
Its operating profit will also remain volatile given its exposure to unforeseen repairs and fluctuations in foreign exchange rates.
Moody's believes Pacnet's EBITDA in 2013 will remain in the US$80-$90 million range, resulting in leverage of approximately 4.5-5.0x range, on a trailing LTM basis, throughout 2013.
Further negative pressure will arise if Pacnet's EBITDA falls below US$20 million on a quarterly basis in 2013 or its debt/EBITDA exceeds 5.0-5.5x. The inability to secure a committed back up facility to enhance its access to liquidity would also be viewed negatively in light of the company's deteriorating cash position.
Upward rating pressure is unlikely given the company's negative outlook, however, the outlook could revert to stable should adjusted debt/EBITDA fall below 4.5x and Pacnet be able to generate positive free cash flow on a sustained basis.
The principal methodology used in rating Pacnet Limited was the Global Communications Infrastructure Rating Methodology published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Pacnet, incorporated in Bermuda in 2006, wholly owns and operates the EAC-C2C network, Asia's largest privately-owned submarine cable infrastructure of 36,800km, as well as the EAC Pacific network which spans 9,620km from Japan to the US. The cables land at 21 cable landing stations across Asia and the US. Pacnet provides data connectivity solutions to major telecommunications carriers, large multinational enterprises, and small- and medium-sized enterprises in Asia Pacific with a need for multinational IP-based solutions and connectivity.
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
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Annalisa Di Chiara Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Gary Lau MD - Corporate Finance Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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