U.S. TelePacific Holdings Corp.

The stable outlook reflects our expectation that revenues will increase in the low-single-digit percent area in 2019 as growth from higher-margin managed services revenue is partially offset by declines in business services revenue. We expect these factors will lead to increased market penetration in managed services among larger business customers and adjusted margins in the low-20% area, resulting in debt to EBITDA in the mid-6x area over the next 12 months. We could lower the rating if increased competitive pressures from the incumbents or weaker economic conditions leads to higher-than-expected revenue churn and lower EBITDA, resulting in FOCF deficits, weaker liquidity, diminished headroom under its bank credit facility covenants, or leverage rising above 7x. Although highly unlikely given our view

...Growth in managed services should offset declines in legacy competitive local exchange carrier (CLEC) business.With its 2016 acquisition of DSCI, U.S TelePacific Holdings Corp. (d/b/a/ TPx Communications) expanded its capabilities in managed services and expanded its geographic reach. The company is diversifying away from declining voice and low-bandwidth Internet services to cloud-based platforms including unified communications as a service (UCaas) and ##-WAN while focusing on high average revenue per user (ARPU) midsized business customers. Cloud services are experiencing healthy secular growth. This strategy has enabled it to grow its average monthly revenue per account to around $1,870 from less than $1,000 a few years ago. Sale and leaseback transaction with Uniti should enable modest deleveraging. In September 2018, TelePacific executed the second part of its sale and leaseback of fiber assets in California, Nevada, Texas, and Massachusetts to Uniti for about $95 million. It used...

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