Moody's rates Paetec Holdings loans B1, Caa1

Moody's Investors Service said it assigned B2 corporate family and probability-of-default ratings to Paetec Holdings Corp., B1 rating with loss-given-default assessments of LGD3 (40%) to its proposed $50 million senior secured revolving credit facility and $625 million first-lien senior secured term loan and a Caa1 rating with a loss-given-default assessment of LGD5 (89%) to its proposed $175 million second-lien senior secured term loan.

The outlook is stable.

The new financing will be used to fund Paetec Communications Inc.'s acquisition of US LEC Corp. for about $560 million, net of cash, and to refinance the $374 million of Paetec Communications' existing debt.

The agency said that although the increased leverage and the free cash flow drain during the integration period will stress the new holding company's capital structure, Paetec Holdings' enhanced operating scale in the eastern United States and the potential for EBITDA growth driven by merger synergies should provides sufficient momentum to maintain the corporate family rating at B2.

The potential financing will increase Paetec Holdings' pro forma adjusted leverage to about 5.3x at closing from 4.8x at June 30, 2006.

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