OREANDA-NEWS. S&P Global Ratings said today that it revised its rating outlook on Mobile, Ala.-based Global Tel*Link Corp. to stable from negative. At the same time, we affirmed all our ratings on the company, including the 'B' corporate credit rating.

"The outlook revision to stable from negative reflects our view that GTL is in a better position to weather FCC regulation after renegotiating its customer contracts, allowing for lower commission payments made to facilities," said S&P Global Ratings' credit analyst Rose Askinazi. "Therefore, we have increased confidence that leverage (4.6x for the LTM ended June 30, 2016) will remain below our 6.5x downgrade threshold over the next two to three years, as we believe the company will be able to continually lower costs if rates are reduced to mostly offset any negative impact to revenue."

The U. S. Federal Communications Commission (FCC) voted to cap inmate calling rates and ancillary service charges in October 2015. While the U. S. Court of Appeals halted the implementation of lower rate caps and lower fees associated with certain single-call services, lower ancillary fees went into effect on March 17 for prisons and June 20 for jails. The FCC voted on new inmate calling rate caps on August 4, which are slightly higher than those outlined in October 2015.

GTL has stated that it will challenge the new rate caps set by the FCC on August 4, which will affect facilities that have call rates above the new rate caps and likely take effect in late 2016 for prisons and early 2017 for jails. A formal appeal was filed with the U. S. Court of Appeals in 2015, but we do not expect a resolution until the end of this year or early next year if an appeal of the recent FCC order is consolidated, or until the end of 2017 if they remain separate. Given the FCC's recent order, we view an out-of-court resolution as less likely.

Our rating reflects GTL's concentrated operations in providing inmate communications services, which is a fairly narrow niche in the telecommunications industry and subject to regulatory oversight. In addition, a number of customer contracts still include facility commission payments, which limit profitability. However, GTL and Securus Holdings Inc. have the dominant share of the inmate telecommunications market, which benefits from high barriers to entry. The market is also characterized by fairly long-term contracts, which gives the company a degree of visibility into future revenue streams. GTL has also made an effort to diversify its revenue over the past few years through ancillary service offerings, such as media and payment services. We believe the company will aim to increase revenue from these services because they are not currently subject to the same level of commissions and regulatory oversight as traditional voice services. However, we believe the adoption of these services is still in the early stages and the value proposition for inmates with shorter stays in smaller facilities is less.

The stable outlook reflects our expectation that GTL will be able to manage future FCC regulation, such that it will maintain leverage below 6.5x and continue to generate free operating cash flow with adequate liquidity.

We could lower the rating if the company is unable to manage future FCC regulation, or if inmate call volumes drop materially, either because of net contract losses to competitors or lower discretionary income, having a negative effect on revenue and profitability. More specifically, we could lower the rating if a reduction in profitability leads to leverage rising above 6.5x on a sustained basis. A more aggressive financial policy, including debt-funded acquisitions and shareholder returns, could also prompt a downgrade if leverage were to rise above the 6.5x level on a sustained basis.

We could raise the rating if leverage improves below 4.5x on a sustained basis. Given ownership considerations, an upgrade would also require a longer-term financial policy supportive of improved credit metrics. Any upgrade would also require further clarity on FCC regulation and our confidence that the company would maintain current levels of profitability.