Moody's Investors Service lowered the senior unsecured debt ratings of Reston, Va.-based competitive local exchange carrier XO Communications to Caa1 from B2 reflecting XO's performance to date and the company's revised guidance of expected future performance. The rating downgrade affects $800 million in credit facilities. Furthermore, Moody's has a negative outlook based on a belief that XO will be constrained in its ability to cover its future funding gap on acceptable terms from public debt and equity markets. Additionally, XO's revised business model may still be impacted by the general economic slowdown.
The business plan incorporates the restructuring of its agreement with bandwidth-merchant Level 3 Communications to purchase fiber networks. The revised agreement cancelled the purchase of metro and inter-city fiber networks in Europe, reallocated prepayments associated with these purchases to existing commitments in North America, and scales back expansion of existing metro fiber networks, aiming to reduce capital requirements by $2 billion over the next five years.
Cedar Rapids, Iowa-based McLeod USA's senior unsecured debt has also been downgraded from B1 to B3 and the senior secured bank rating has dropped to B2 from Ba2. Moody's is concerned that McLeod's revised business model may be impacted by the general economic slowdown and in particular by the broad-based scaling back of its customer's telecommunications spending plans.
McLeod's previous rating was underpinned by expectations that EBITDA leverage would be reduced to 3x by 2003, however, this is now deemed unlikely. Ratings are supported though by McLeod's operational performance to date, its positive EBITDA and the strength of its seasoned management team. Unlike many of its peers, the company is EBITDA positive and enjoys a diversified revenue base contribution from its CLEC, ILEC and publishing operations.
Milacron's ratings are on review by Moody's for possible downgrade with approximately $590 million of debt obligations and credit facilities affected. The $375 million senior unsecured revolving credit, due 2005, is currently at Ba1. The Cincinnati, Ohio-based manufacturer and distributor of tools, which supplies machinery and systems to produce plastic and metal products, has announced that North American orders across the company's business lines have weakened significantly, and that Milacron's earnings guidance for the second quarter of 2001 has been lowered materially.
The rating action reflects Milacron's assessment that North America is experiencing the worst downturn in capital spending for plastics processing equipment in more than two decades. Additionally, the rating action reflects the uncertainty of the duration of the downturns in demand for both the metalworking and plastics businesses. While Milacron is currently in full compliance with the company's bank credit agreement covenants, Moody's is concerned that covenant violations may occur late in 2001 in the event that performance does not improve.