Moody's may downgrade Eschelon

Moody's Investors Service said it has placed Eschelon Operating Co.'s B3 corporate family rating and B3 $92.1 million 8 3/8% global notes due 2010 on review for possible downgrade following the company's announcement that it is acquiring Oregon Telecom Inc. for $20 million in cash.

Given the company's $30 million cash balance as of Sept. 30, Moody's predicted that the acquisition will be largely financed with new debt. The potential financing would increase Eschelon's pro forma leverage, thereby pressuring the ratings downwards. Eschelon recently filed a shelf registration to raise up to $150 million in debt or equity.

The review for possible downgrade will focus on Eschelon's potential financing alternatives and the likely consequences, the company's strategy for successfully integrating Oregon Telecom's operations and generating meaningful cost reductions, the company's ability to generate sustainable pro forma free cash flows and Eschelon's ongoing acquisition strategy and its potential impact on the company's capital structure.

Moody's also affirmed Eschelon's SGL-3 speculative grade liquidity rating. The liquidity rating would come under pressure, however, if Eschelon were to close the proposed acquisition of Oregon Telecom using existing cash on the balance sheet without raising additional capital from external sources.

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