Fitch Affirms Cincinnati Bell's IDR at 'B+'; Revises Outlook to Positive

Business Wire, April 30, 2007

CHICAGO -- Fitch Ratings has affirmed Cincinnati Bell Inc.'s (CBB) issuer default rating (IDR) at 'B+'. In addition, Fitch has affirmed other ratings as listed below. The Rating Outlook has been revised to Positive from Stable.

Cincinnati Bell, Inc. (CBB)

--IDR 'B+';

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

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

--$742 million senior notes 'BB-/RR3';

--$632 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'.

Fitch's rating of CBB reflects expectations for stable performance on a consolidated basis and the lower level of business risk associated with the company's integrated position in the local exchange and wireless businesses. Historical free cash flow levels have been strong as measured by free cash flow margin (free cash flow as a percentage of revenues). These factors are balanced against the company's highly levered balance sheet relative to its peer group.

The Positive Rating Outlook reflects the potential for moderate delevering to occur during 2007 and 2008, even while CBB continues to invest in its wireless and technology solutions businesses. The revised Outlook is also supported by the relative stability in its integrated wireline and wireless business model. Fitch will monitor prospective competitive conditions and CBB's capital structure and investment strategies prior to determining whether or not an upgrade is warranted.

Over the recent past, CBB's strategy has focused on delevering its balance sheet and defending and growing its local exchange and wireless businesses. In 2006, delevering slowed as the company acquired the remaining 19.9% of Cincinnati Bell Wireless (CBW) owned by AT&T Mobility, LLC (formerly Cingular Wireless LLC) for nearly $87 million and acquired spectrum in the advanced wireless services (AWS) auction for $37 million. Debt declined modestly in 2006, even after considering these investments. CBB's wireline business accounted for 63% of consolidated revenue in 2006, while wireless generated 20% of revenue and the technology solutions business produced 17% of revenue. Competitive pressure in the wireline business increased in 2006, as evidenced by the 4.7% decline in total access lines year-over-year. Thus far, access-line declines have been primarily due to wireless substitution, but losses have increased from cable telephony. To protect the 20% of revenue derived from consumer voice services, CBB has been aggressively bundling wireless and high-speed data services with its wireline voice services into a package the company refers to as a 'super bundle'. As of year-end 2006, approximately 32% of the consumer households in its incumbent local exchange operating territory subscribed to a super bundle, up from 26% at year-end 2005.

CBW is the market share leader in the Cincinnati and Dayton, Ohio, basic trading areas and provides an avenue for CBB to further strengthen its service bundle. In 2006, total wireless subscribers grew 6.6% over the previous year, an improvement over the 3% growth rate in 2005 over the previous year. Importantly, higher value post-paid subscribers rose 16.1% in 2006, compared to the 2.9% increase in 2005. A major reason the higher growth rates in 2006 was due to lower churn resulting from improved network quality. Post-paid customer churn was 1.6% in 2006, compared with 2.2% in 2005, and the lower level can be attributed to the completion of the transition from the time division multiple access (TDMA) network to the global system for mobile communications (GSM)/general packet radio service [GPRS]) network. Wireless revenues grew 10%, aided by a 3.4% increase in post-paid average revenue per user (ARPU) in 2006 to $46.18.

In 2007, CBB is expected to expand its data center business in order to take advantage of increased demand for data center space in the broader Cincinnati market. At year end 2006, its 91,000 square feet of capacity was approximately 91% utilized. Fitch believes there is modest risk associated with the expansion of this business. CBB's risk is mitigated by the multi-year leases signed by its customers, and by the fact that its customers buy, own and frequently operate the hardware located in the highly specialized environment provided by CBB.

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 2006, the capital structure reflected approximately $675 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 CBW.

CBB reported total debt outstanding of $2.073 billion at the end of 2006, a reduction of approximately $12 million from year-end 2005. CBB has an undrawn five-year $250 million credit revolving credit facility available which matures in 2010. CBB has no major maturities until the revolver matures, and significant quarterly installments on the term loan do not start until 2011. In 2007, CBB initiated an $80 million accounts receivable securitization program in order to lower its overall cost of financing. Investors should note that the company's 7-1/4% notes due in 2013 will be callable beginning in July 2008. The notes contain a restricted payments test, which constrains the company's ability to pay a dividend or repurchase common stock. Fitch believes that if CBB were to call the notes and institute a dividend or stock-repurchase program, delevering would continue, although at a slower pace.