Fitch Affirms Rural Cellular IDR at 'CCC'.

CHICAGO -- Fitch Ratings has affirmed the credit ratings of Rural Cellular Corporation (RCCC) as follows:

--Issuer default rating (IDR) 'CCC';

--$60 million first lien credit facility 'B/RR1';

--$510 million second lien secured notes 'B-/RR2';

--$325 million senior unsecured notes 'CCC-/RR5';

--$475 million senior subordinated notes 'CC/RR6';

--11.375% senior exchangeable preferred stock 'C/RR6';

--12.25% junior exchangeable preferred stock 'C/RR6'.

RCCC's Rating Outlook is Stable.

The affirmation of RCCC's ratings incorporates the very high leverage, the limited financial flexibility, the competitive operating environment and its reliance on non-retail revenue sources. Fitch also believes longer-term event risk is present from potential Universal Service Fund (USF) reform and future roaming rate pressure from the 700 MHz spectrum auction. The lack of past cash flow growth has not adequately supported RCCC's capital structure, currently evidenced by leverage (debt and preferred securities / EBITDA) of 9.0 times (x) and the nonpayment of cash dividends related to its exchangeable preferred securities. Adjusting for the senior preferred stock redemptions subsequent to the third quarter ending, RCCC's preferred stock obligation totaled $645 million, including $164 million in accrued dividends.

Positively, RCCC appears to be gaining traction on actions taken to address its operational challenges as third quarter results showed marked improvement in gross additions, churn and net additions due to the company's improved network quality and progress in migrating subscribers. In addition, ARPU continues to show growth driven primarily by gains in data revenue. Fitch believes this positive momentum coupled with continued stability in roaming revenue should lead to moderate growth for RCCC's cash flows in 2007. However, any excess cash flow generated will likely go to reducing the preferred stock obligation, which Fitch views as a formidable challenge given RCCC's high leverage.

With the USF program under review, the combination of a slow-growing high-cost support fund and an ever-increasing number of wireless operators making claims on the fund have created significant pressure on the program. For the last 12 months, RCCC received approximately $44 million in USF. As a percent of cash flow from operations, this is approximately 72%, which is significantly higher than Alltel or Dobson Communications. Until the FCC determines the extent of reform associated with the program, Fitch remains cautious with wireless issuers where disbursements are a material percentage of total cash flow.

RCCC's liquidity is limited given its cash position, the minimal availability on its credit facility and the inability to pay its preferred dividend obligation. The nonpayment of dividends on the senior preferred stock for six or more quarters has caused a voting rights trigger event, which restricts the company's from refinancing debt or incurring additional indebtedness. Cash and short-term investments at the end of the third quarter of 2006 was approximately $157 million. Subsequent to third quarter ending, RCCC repurchased $13 million in preferred stock and acquired rural properties adjacent to its Minnesota operations that should close in the first quarter of 2007. The company has drawn down $58 million of the $60 million available on its revolving credit facility that matures on March 25, 2010.

Over the longer term, Fitch believes RCCC must address the preferred stock issue although options are limited when considering the company's relatively low market capitalization compared with its total debt obligation. Fitch expects RCCC to continue a similar strategy on repurchasing senior preferred stock through small cash transactions or equity exchanges when available. Fitch believes that if the company is successful in further reducing the preferred stock obligation and materially increasing cash flow in 2007, then it's feasible for RCCC to potentially exchange the senior preferred stock for senior subordinated exchange debentures. If RCCC issues the subordinated debentures, the 8.25% indentures specify that the company must have leverage less than 6.5x at the time of the exchange. Otherwise, RCCC's credit facility has financial covenants of total debt to adjusted EBITDA of 6.75x, which would not provide a considerable amount of cushion under its covenants in the event unfavorable business or economic conditions develop or significant USF reform occurs. By exchanging the senior preferred stock, RCCC would be in a position to begin addressing the growing junior preferred obligation that was $311 million including accrued dividends, an increase of $35 million from a year ago. Over the rating horizon, since over $800 million in preferred and debt securities mature in 2010, Fitch also expects RCCC will examine opportunities to refinance and extend debt securities.

Fitch's Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors can be found at www.fitchratings.com/recovery.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.