Cogent Communications downgraded to ’B’ by S&P on higher leverage

Investing.com -- S&P Global Ratings downgraded Cogent Communications Group LLC to ’B’ from ’B+’ on Thursday, citing a sharp increase in leverage to 7.5x as of June 30, 2025, from 5.5x at year-end 2024.

The rating agency assigned a negative outlook to the company, indicating the potential for a further downgrade within the next 12 months if growth in Cogent’s Wavelength business fails to materialize.

The downgrade follows two debt-financing transactions completed by Cogent during the quarter – a $174.4 million Internet Protocol version 4 (IPv4) issuance and a refinancing of its senior secured notes, which added another $100 million to debt.

S&P noted that Cogent’s financial position was further weakened by lower T-Mobile payments, ongoing elevated operating expenses and capital expenditures, and Wavelength sales that have underperformed expectations.

The rating agency expects Cogent to generate roughly breakeven free operating cash flow (FOCF) this year. Through the first six months of 2025, the company burned about $72 million of reported FOCF, including T-Mobile payments.

S&P projects that elevated expenses will decline in the second half of the year, with capital expenditures returning to a more normalized level of about $100 million and Wavelength sales increasing. However, higher interest expenses from recent debt transactions will pressure cash flow until Wavelength sales ramp up.

The company’s deleveraging prospects for 2026 and beyond are underpinned by potential significant growth in Wavelength revenue. S&P expects this growth, based on a robust backlog and reduced provisioning times, to enable Cogent to increase revenue by over 5% annually starting in 2026, with EBITDA growth above 10% in both 2026 and 2027.

Cogent’s discretionary cash flow remains negative in 2025 as the company maintains its high dividend of approximately $180 million annually, which is currently being funded through debt issuance.

S&P could lower its rating further if Cogent is unable to substantially grow its Wavelengths business, cannot grow FOCF to debt approaching 5%, or if leverage remains above 6x over the next year.

The outlook could be revised to stable if Cogent reduces leverage to below 6x on a sustained basis and generates FOCF to debt above 5%, which could occur through improved Wavelength service sales, sustained FOCF to debt above 5%, or positive discretionary cash flow.

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