Rating Action Overview

• U.S.-based cable provider Radiate Holdco LLC's operating and financial results continue to deteriorate due to heightened competition and integration problems with acquired WoW assets. As a result, we expect S&P Global Ratings-adjusted leverage to be in the high-7x area and for free operating cash flow (FOCF) to be negative through 2023.
• Even as FOCF somewhat improves, we project limited FOCF through 2025 due to higher interest rates, capital spending requirements, and limited EBITDA growth.
• We are therefore lowering all of our ratings on Radiate two notches, including our issuer credit rating that is being lowered to 'CCC+' from 'B', because we believe its capital structure may be unsustainable without a reversal of competitive and operating trends and more favorable macro-economic and capital markets conditions over the longer term.
• The negative outlook reflects the potential for a lower rating if we believe a default or restructuring is likely within the next 12 months.

Rating Action Rationale

We believe Radiate is dependent on favorable business, financial, and economic conditions to meet its financial obligations long-term.  The company has taken steps to address operating challenges and strengthen its position in the marketplace by signing an Mobile Virtual Network Operator (MVNO) agreement to launch a wireless product in the coming months. We believe this provides a path to compete more effectively with scaled incumbents. However, there is uncertainty in the company's ability to stabilize subscriber trends and penetration levels in the current competitive and macroeconomic environment. Furthermore, we believe that there is an increased likelihood that the company could have to refinance its upcoming secured and unsecured maturities in 2026 and 2028, respectively, at higher interest rates, which could limit free operating cash flow longer-term.

Given the operating challenges in 2022, we believe that it will be very difficult for Radiate to grow residential broadband subscribers at a rate that would drive meaningful earnings growth in 2023 and potentially beyond.  We revised our forecast to 40,000 net residential broadband subscriber losses in 2022, down from our previous expectation of about 5,000 net adds this year. In 2023, we believe that the company can stem the rate of decline to less than a quarter of projected losses in 2022, due to operational improvements at the recently acquired WOW assets, new builds, and edge-out activity. However, we believe that heightened competition from Comcast and Charter, which can bundle broadband with wireless service at competitive prices, increasing competition from local telcos who are aggressively building out fiber-to-the-home services, and low move activity in housing will remain a headwind for subscriber growth over the coming years. Furthermore, we believe that subscriber growth could remain under pressure as fewer copper wire-based customers convert to cable, instead opting for cheaper fixed-wireless service, especially young, urban renters, which we believe account for a higher percentage of the company's subscriber base than most peers. We believe that in a recessionary environment, it is possible that price-sensitive customers opt for lower-priced fixed wireless services, which could continue to pressure subscriber metrics over the next year.

Elevated capital spending combined with high interest rates could limit cash generation in the near-to-medium term.  In 2023, we believe that the company will record a FOCF deficit of about $50 million-$70 million as capex is reduced by about $100 million, moderating to the mid-20% area. This compares with negative free operating cash flow FOCF $130 million through the first nine months of 2022 in part due to elevated capex expenditures as part of the company's new build and edge-out strategy. However, in the outer years, we believe that capital intensity could remain in the low-to-mid-20% area on network upgrades. We believe that Radiate will likely need to upgrade its network to DOCSIS 4.0 from DOCSIS 3.1 to effectively compete with fiber competitors and larger, better-capitalized incumbent cable providers (such as Charter and Comcast), which should limit FOCF in the near-to-medium term.

We believe lower earnings growth and elevated capital spending could keep leverage elevated in the high-7x area through at least 2023.  We expect pro-forma earnings growth to be flat-to-low-single-digit percent area through 2023 as low-single digit percent subscriber declines are partially offset by low-to-mid-single-digit percent average revenue per user (ARPU) growth on modest rate increases and customer migration to faster broadband speeds. In addition, we believe that the company will need to continue to draw an incremental $80 million-$100 million on its revolving credit facility to partially fund its capital spending initiatives for 2023, which will likely keep leverage in the high-7x area.

Outlook

The negative outlook reflects the pressure on operating and financial performance due to the increasingly intense competitive broadband environment, the weakening economy, and unfavorable capital market conditions as well as the potential for a lower rating if we believe a default or restructuring is likely within the next 12 months.

Downside scenario

We could lower our rating on Radiate if we believe it will face a near-term liquidity shortfall or engage in a distressed exchange in the next 12 months because financial metrics continue to weaken due to macro-economic headwinds or continued operational underperformance. 

Upside scenario

We could revise our outlook on Radiate to stable if the company is able to stem the decline in net residential broadband subscribers. Although unlikely over the next year, we could raise our rating on Radiate if the company is able to stabilize or even reverse operating trends such that it is able to reduce leverage below 6.5x with positive FOCF and a credible forward-looking deleveraging path that provides more cushion to absorb adverse business, financial and/or economic conditions.

Company Description

Stonepeak Infrastructure-owned Radiate provides high-speed internet and TV in three main regions serving 16 markets: the Northeast/Chicago region (marketed under the RCN brand and consisting of Lehigh Valley, Pa., Chicago, New York City, Boston, Washington, D.C., and Philadelphia); the Texas region (marketed under the Grande brand and consisting of Dallas, Austin/San Marcos, San Antonio, Midland-Odessa, Waco/Temple, and Corpus Christi); and the Western region (marketed under the Wave brand and consisting of Seattle, Portland, San Francisco, and Sacramento).

Our Base-Case Scenario

• U.S. GDP declines 0.1% in 2023 and grows a modest 1.4% in 2024 compared with 1.8% growth in 2022.
• Pro-forma HSD revenue grows 1%-3% per year through 2023, driven by low-to-mid-single-digit percent ARPU growth on modest price increases and customer movement to faster data tiers. We also assume low-single digit percent subscriber declines because of competitive headwinds and low move activity in housing, partially offset by improvement at the acquired WOW assets, new builds, and edge-out activity;
• Pro-forma video revenue losses of 8%-10% per year through 2023 as the company loses 15%-17% of subscribers per year. The increase is driven by rising prices as the company passes along the full cost of programming to its customers;
• The adjusted EBITDA margin remains in the 42%-43% through 2023 as a mix shift to higher-margin broadband services and business services is offset by costs associated with the roll-out of its MVNO wireless service, which we believe will launch in the first quarter of 2023; and
• Capital spending as a percent of revenue moderates to the mid-20% area in 2023, remaining higher than most incumbent operators as it grows homes passed by 3.5%-4% per year. This is down from 28%-29% in 2022, adding around 175,000 homes this year (about 4.5%). As HSD penetration rates decline modestly in a more competitive environment, we believe the path to growth is ongoing footprint expansion.

Based on these assumptions, we arrive at the following credit metrics:

• Relatively flat EBITDA growth in 2023 and mid-single-digit growth in 2024
• Adjusted debt to EBITDA of 7.6-7.8x in 2023 and low-7x area in 2024;
• Funds from operations (FFO) to debt of 6%-8% through 2024;
• Negative FOCF of $50 million to $70 million in 2023, turning slightly positive in 2024; and
• EBIT interest coverage of 0.2x-0.3x through 2024.

Liquidity

We view Radiate's liquidity as adequate, reflecting our expectation that the company's sources of liquidity will exceed uses by about 1.5x over the next 12 months and net sources will remain positive, even with a 15% decline in forecast EBITDA. The company does not have any near-term debt maturities and has ample revolver capacity to handle operational and financial obligations. Therefore, the company does not require access to capital over the next year.

Principal Liquidity Sources

• Cash of about $41 million at Sept 30, 2022;
• About $330 million of availability under its $455 million revolver due 2025; and
• Funds from operations of about $350 million-$370 million over next 12 months.

Principal Liquidity Uses

• Capital spending of about $400 million-$430 million over next 12 months;
• Modest working capital outflows of about $10 million-$20 million; and 
• Annual debt amortization of about $34 million.

Covenants

The revolving credit facility is subject to a springing senior secured first-lien, net-leverage ratio of 7x if more than 35% is drawn at quarter end. We believe that the revolver could be tested over the next 12-months. However, if it were, we expect Radiate to maintain at least a 30% cushion over the next year.

Environmental, Social, And Governance

ESG credit indicators: E-2, S-2, G-3

Governance factors are a moderately negative consideration in our credit ratings analysis of Radiate. Our assessment of the company's financial risk profile as highly leveraged reflects corporate decision-making that prioritizes the interests of controlling owners, in line with our view of most rated entities owned by private equity sponsors. Our assessment also reflects their generally finite holding periods and a focus on maximizing shareholder returns.

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Criteria | Corporates | Industrials: Key Credit Factors For The Telecommunications And Cable Industry, June 22, 2014
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Ratings List