Moody's rates Eschelon notes Caa1

Moody's Investors Service said it assigned new ratings for Eschelon Telecom Inc. and its operating subsidiary, Eschelon Operating Co. Moody's assigned Eschelon Telecom Inc. a Caa1 senior implied rating, a Caa2 issuer rating, and an SGL-3 liquidity rating. Moody's rated Eschelon Operating Co.'s $100 million of senior unsecured notes maturing in 2010 Caa1.

The outlook is stable.

Moody's said the ratings for Eschelon reflect high leverage and low interest coverage for the proposed note offering; that the company will have to continue a high rate of growth for at least two years to generate meaningful free cash flow; a slight cash cushion to fund performance shortfalls; high risk of performance shortfalls due to the company's need to continue to take market share from the incumbent local exchange carrier and utilize favorable regulatory pricing for UNE-L (unbundled network element loop) and UNE-P (unbundled network element platform) to grow operating cash flow; and thin asset coverage.

The ratings benefit, however, from the company's consistent growth in access lines, customers on net, revenue, gross margin, and EBITDA; favorable growth and income demographics in its markets; a business strategy focused on service differentiation rather than price differentiation; and an improved liquidity (extended, bullet maturity) profile resulting from the proposed note offering.

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