Moody's cuts Paetec

Moody's Investors Service said it changed the outlook on Paetec Holding Corp.'s debt to negative from stable, reflecting concerns about execution risk related to integration of the historically underperforming operations of Cavalier Telephone Corp., which Paetec agreed to acquire for $460 million.

Moody's also said it downgraded Paetec's short-term liquidity rating to SGL-2 from SGL-1, reflecting the moderately worsening pro forma liquidity profile as Paetec devotes its cash resources to integrate and turn around the Cavalier operations.

The agency also said it placed the debt of CavTel Holdings, a subsidiary of Cavalier, on review for possible upgrade. The upgrade review incorporates the benefits of Paetec's stronger credit profile and the high perceived likelihood that the transaction will be completed as planned, the agency said.

Paetec's ratings reflect its high leverage for its rating category and modest free cash flow, compounded by the challenge to turn around and integrate the acquired Cavalier properties amid the revenue declines at Cavalier's non-fiber businesses, Moody's said.

The rating also reflects a view that the operating environment for competitive local-exchange carriers will likely continue to be difficult, the agency added.

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