Fitch Ratings Assigns 'B' Rating to Madison River Capital, LLC

Business Wire, May 18, 2004

Business Editors

CHICAGO--(BUSINESS WIRE)--May 18, 2004

Fitch Ratings has assigned an initial rating of 'B' to Madison River Capital, LLC's (Madison River) $200 million outstanding of 13.25% senior unsecured notes due March 2010. The Rating Outlook is Stable.

The rating reflects the stability of the company's rural local exchange operations, including moderate revenue growth prospects, opportunity for free cash flow and solid expense controls. The rating also recognizes Madison River's relatively high leverage for a local exchange carrier, potential for higher levels of competition and technological substitution, as well as its exposure to growing regulatory risk.

Madison River's revenues grew 1.2% in 2003, and Fitch expects revenue growth to be in a 1%-2% range for 2004. The company is experiencing a moderate level of access line losses-approximating 2% -- with losses primarily attributed to second line loss, as well as primary line losses in its Gallatin River property stemming from a weak local economy. Offsetting the line losses has been the moderate growth in penetration of its long distance services and the strong revenue growth associated with the successful marketing of its high-speed digital subscriber line (DSL) product. Notably, the company has reached a penetration rate of nearly 24% of primary residential lines with its DSL offering, a relatively high rate compared to other DSL operators as well as cable modem providers. Free cash flow, which was approximately $25 million in 2003, is expected to exceed $20 million in 2004. Madison River's capital expenditures, which were approximately 7% of revenues in 2003, are relatively low for local exchange carriers, but appropriately reflect the slow growth in its service territory and high degree of DSL availability (approximately 90%). Liquidity is very good, with $15.2 million in cash on hand at March 31, 2004, and $41 million on two undrawn lines of credit.

In 2003, total debt to EBITDA was approximately 6.8 times (x). Leverage was moderately lower, at 6.3x, when the subordinated capital certificates (SCCs) issued by Madison River's lender, the Rural Telephone Finance Cooperative (RTFC), are netted against debt. Madison River is required to purchase SCCs from the RTFC in the amount of 10% of funds borrowed from the RTFC and the SCCs are redeemed when Madison River makes principal payments on its borrowings. The SCCs are a legal obligation of the RTFC.

At the current time, Fitch believes the competitive threats faced by Madison River are moderate compared to urban-based local exchange carriers. Competition from wireless carriers is expected to increase, but remain below levels faced in urban areas. Cable operators pose a threat with voice telephony, particularly as they roll out Voice over Internet Protocol (VOIP) services. Madison River's strong DSL penetration rate, if sustained, acts as a counter to this threat. Lastly, there is virtually no competition from operators employing the unbundled network elements platform and Fitch believes the company is not likely to face a significant threat from this source. Regulatory risk is relatively high for rural operators as regulations evolve regarding universal service, VOIP and intercarrier compensation (access charges). These issues are very interrelated, and outcomes uncertain, but Fitch does not expect material adverse outcomes as federal regulators and legislators have voiced strong support for the rural industry over the past couple of years. Fitch notes that Madison River is less exposed to changes in the high cost federal universal service funds, as these funds were approximately 1.2% of revenues in 2003.

In addition, the rating of the senior unsecured notes reflects the subordination of the notes to $426.6 million of senior secured borrowings from the RTFC issued by Madison River's subsidiary, Madison River LTD Funding (MRLTDF). MRLTDF is a holding company for three rural telephone subsidiaries: Mebtel, Gulf Coast Services and Coastal Communications. A fourth telephone subsidiary, Gallatin River Holdings, LLC, has provided a guaranty to the RTFC and its operating assets and revenues are subject to a first mortgage lien in favor of the RTFC.

Fitch believes that over the next few years the event risk posed by additional acquisitions by Madison River is relatively moderate, given the company's limited financial flexibility. Small acquisitions are possible, and it appears management would have an interest in larger acquisitions, but Fitch believes larger acquisitions may have to be financed outside of the rated entity. Fitch also notes that certain of Madison River Telephone's investors (Madison River's parent) have a put right to require Madison River Telephone to acquire their interests beginning in January 2006. Exercise of the put would cause the principal of the existing senior unsecured debt to become due immediately, thus somewhat reducing the likelihood of the exercise of the put given the company's current limited financial flexibility.