Fitch Rates Cincinnati Bell's IDR at 'B+'; Outlook Stable

Fitch Ratings announced it has affirmed Cincinnati Bell Inc.'s (CBB) Issuer Default Rating (IDR) at 'B+', and the Rating Outlook remains Stable.

In addition, Fitch said it has affirmed the company's other ratings and its subsidiary ratings as listed at the end of this release.

The affirmation of CBB's 'B+' IDR reflects Fitch's expectation for leverage to approach 4.2 times (x) in 2009--and decline moderately thereafter to below 4.0x in 2011--and the lower level of business risk associated with the company's business model which integrates the wireline and wireless businesses. Competition is prevalent in each of its business segments but through ongoing efforts to diversify revenues and investment in growth areas CBB was able to produce consistent revenue and EBITDA growth through the end of 2008.

In the first half of 2009, economic and competitive pressures have had a moderately negative effect on consolidated revenues, as revenues have declined 1.8 percent (when volatile, but low-margin data center related equipment sales are excluded). The effect on EBITDA has been mitigated by aggressive cost controls. Fitch expects free cash flow in 2009 to be slightly less than the $152 million generated in 2008, but still remain at 10 percent of revenues. A portion of free cash flow generation has been devoted to continued debt reduction. Constraining factors in the company's ratings include the continuing competitive pressure on its wireline business and, more recently, its wireless operations, and its $150 million stock repurchase program which expires in early 2010.

CBB's operating strategy focuses on defending and growing its wireline, wireless and technology solutions segments. Growth in the wireline data, wireless, and technology solutions business has offset the effects of competition for voice services so that in the first half of 2009, local wireline voice services revenues were 26 percent of consolidated revenues, versus 40 percent in 2005. Revenues provided to business customers grew from 53 percent in 2005 to 59 percent by the end of 2008.

CBB's investments in its data center business have contributed to the growth in revenues from business customers and have strengthened its competitive position in the enterprise market. For CBB, the data center business has provided a growing source of revenue with relatively attractive returns; contracts are typically for 10 to 15 years and contain escalator clauses. CBB is also able to gain ancillary revenues from transport services and hardware sales.

CBB's 'BB-' senior unsecured rating reflects the subordination to the company's senior secured debt and the Cincinnati Bell Telephone Co. (CBT) notes. At the end of the second quarter of 2009, the capital structure reflected approximately $516 million in CBT notes, secured CBB notes and credit facility debt that was senior to CBB's senior unsecured debt. The notching of the senior secured debt above the senior unsecured debt is indicative of the anticipated recovery by the senior secured debt holders and their first-priority claim on the economic interests of CBT and Cincinnati Bell Wireless.

CBB reported total debt outstanding of $1.929 billion at the end of the second quarter of 2009, a decrease of $31.7 million from year-end 2008. Liquidity is mainly provided by its credit facility and free cash flow generation, as cash at June 30, was nominal at $2.6 million. As of the end of the second quarter of 2009, $153.3 million was available on its $210 million secured revolving credit facility. Fitch estimates the company could generate approximately $125 million to $130 million in free cash flow in 2009. CBB also has a $115 million accounts receivable securitization program, of which $89 million was outstanding (the maximum permitted) as of June 30.

Near-term maturities are nominal and primarily consist of capital leases and the $0.5 million quarterly amortization of the term loan B; there are no significant maturities until the fourth quarter of 2011, when the term loan B amortization accelerates at $50.3 million per quarter through the final payment of the unpaid balance on Aug. 31, 2012. Also in 2012, the accounts receivable program matures in March, and the revolving credit facility matures on Aug. 31, 2012.

The credit facilities contain a 4.5x leverage covenant, which declines to 4.25x on June 30, 2010. Investors should note that the company's 7-1/4 percent notes due in 2013 are callable as of July 2008. The notes contain the most restrictive covenants of the debt in CBB's capital structure with regard to restricted payments.

In 2009, Fitch estimates capital spending will approximate $225 million. The level of capital spending will depend on the anticipated demand for capacity in CBB's three business segments. Fitch notes that in the data center business CBB manages capacity additions with an eye toward maintaining high rates of utilization.

Ratings are affirmed as follows:

Cincinnati Bell

--IDR 'B+';

--Senior secured credit facility 'BB+/RR1';

--$50 million senior secured notes 'BB+/RR1';

--$694 million senior notes 'BB-/RR3';

--$571 million senior subordinated notes 'B/RR5';

--$129 million convertible preferred stock 'B-/RR6'.

Cincinnati Bell Telephone (CBT);

--IDR 'B+';

--$230 million senior unsecured notes 'BB+/RR1'.

The Outlook for all ratings is Stable.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'fitchratings.com'.

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