Moody's downgrades FairPoint on high default risk

NEW YORK - Moody's Investors Service on Monday downgraded the corporate debt rating of phone company FairPoint Communications Inc. deeper into junk due to a high probility of default.

The credit ratings agency cut FairPoint's rating two notches to "Caa2" — eight notches into junk status — from "B3." Faipoint's ratings on its secured and unsecured debt also were lowered. The outlook is negative. Moody's said it would expect a reduced, although still above-average, recovery rate on all FairPoint debt.

FairPoint is exchanging its 13 1/8 percent senior unsecured notes due 2018 for debt that's essentially the same. But the swap would reduce FairPoint's interest costs in the second and third quarters so it wouldn't violate debt covenants.

The tender offer hinges on 95 percent of debt holders accepting the deal. Without their agreement, FairPoint said it might not be able to pay interest on its debt due on Oct. 1.

Moody's said the transaction is similar to "a partial restructuring and a deemed limited default." The agency said further restructuring of the balance sheet is "inevitable, as the company's current capital structure is unsustainable."

Charlotte, N.C-based FairPoint has 1.4 million phone lines, mainly in rural areas or small and medium-size cities. Shares of FairPoint rose 7 cents to close at 63 cents on Monday.

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