Moody's rates Quanta loan Ba3

Moody's Investors Service assigned ratings for the first time to Quanta Services Inc., including a Ba3 rating on its $200 million senior secured credit facility. The outlook is stable.

The ratings incorporate Quanta's short history in its current configuration, the poor operating performance and credit erosion of the past two years, the financial and integration risks that accompany an aggressive expansion strategy, the large (albeit reduced) goodwill exposure, and concerns over the quality of the accounts receivable exposure.

At the same time, Moody's said the ratings acknowledge Quanta's size and scale within its industry, favorable industry dynamics, solid free cash flow generating ability, enhanced liquidity as a result of the recent convertible debt offering, strong customer relationships, and appealing growth opportunities.

The stable rating outlook reflects Moody's expectations that Quanta will maintain capital structure discipline while pursuing expansion opportunities and that excess cash flow will be used principally to deleverage the balance sheet.

Moody's noted that due to weakness in nonresidential construction, a shakeout in the telecommunications sector, some unpleasant surprises in the cable television industry, the electric power industry's being rocked by energy trading scandals, and the time and costs expended in defending against an unwanted takeover attempt, Quanta has had to weather two difficult years. Revenues declined, write-offs and losses were taken, and credit metrics deteriorated.

Pro forma for the recent $270 million convertible subordinated debt offering, which is not rated by Moody's, and the proposed new senior secured credit facility, Quanta's debt/capitalization and debt/EBITDA ratios as of the trailing 12 months ended June 30 were 44% and 4.7x, respectively. This compares to roughly 30% and 1.9x at year-end 2001.

Moody's said it is likely to be well into 2004 before the company starts to repair these and other financial ratios in any meaningful sense. However, despite the weakness in its markets, Quanta has been able to generate strong free cash flow in 2001 and 2002 and will likely be free cash flow positive in 2003 as well.

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