OREANDA-NEWS. S&P Global Ratings today said it assigned its 'B-' long-term corporate credit rating to Woodstock, N. B.-based Xplornet Communications Inc. The outlook is stable.

At the same time, S&P Global Ratings assigned its 'B' issue-level rating and '2' recovery rating to the company's proposed US$285 million senior secured first-lien term loan. The '2' recovery rating reflects our expectation of substantial (70%-90%, upper end of the range) recovery in the event of default. We also assigned our 'B+' issue-level rating and '1' recovery rating to the company's proposed US$50 million revolver, given its priority position as a first-out obligation. The '1' recovery rating reflects our expectation of very high (90%-100%) recovery in the event of default.

"The ratings on Xplornet reflect the company's position as a provider of fixed wireless and satellite-based broadband Internet services to a small base of largely rural customers in 'uncabled' areas of Canada," said S&P Global Ratings credit analyst Donald Marleau. "The ratings also reflect the company's large debt load, heavy fixed charges for noncash payment-in-kind interest and preferred dividends, and negative free operating cash flow because of persistent growth investments," Mr. Marleau added.

Xplornet is the eighth-largest Internet service provider in Canada, serving more than 300,000 subscribers in mostly rural areas.

The stable outlook on Xplornet reflects S&P Global Ratings' view that successful deployment of new satellite capacity should enable continued revenue and earnings growth, improving currently weak cash flow measures by 2018. After large capital expenditures in 2016 and 2017, we expect neutral free operating cash flow as the company adds new services. We also believe that the current rating would be supported by the refinancing of unsecured debt that relieves currently onerous payment-in-kind (PIK) terms.

We could lower the rating if Xplornet's revenue and earnings fail to improve after satellite deployments. As such, we would likely lower the ratings if any key credit measure deteriorates because of weaker earnings, not least of which if FFO cash interest coverage drops below 1.5x, which we believe would indicate the company was having difficulties generating expected revenue growth from new services.

We are unlikely to raise the rating in the next year, given heavy capital expenditures and uncertain earnings growth. That said, we could raise the rating if Xplornet generated positive free operating cash flow, which we believe would enable the refinancing of costly PIK debt.