Fitch Ratings has affirmed the Issuer Default Rating (IDR) of
Windstream Services, LLC (Windstream)--formerly known as Windstream
Corporation--and its subsidiaries at 'BB'. Windstream is a
wholly-owned subsidiary of Windstream Holdings, Inc. (NASDAQ: WIN).
The Rating Outlook is Stable. A list of affected issuers is at the
end of the release.
KEY RATING DRIVERS
Revenue Mix Changes: Windstream derives more than 70% of revenue
from business services (including carrier services) and consumer
broadband services. These revenues have growing/stable prospects.
At the same time, pressure remains on legacy voice and
regulatory-derived revenues (switched access and universal service
funding). As the legacy revenues dwindle in the mix, there will be
less pressure on revenues going forward. The company has positioned
its business service offerings to target mid-sized businesses. For
a pure wireline operator, Windstream's revenues are somewhat more
diversified than other wireline operators as acquisitions have
brought additional business and data services revenue.
Near-Term Pressures: Windstream experienced a nominal 0.2%
decline in business service revenue in 2014. Fitch has expected
business service revenue growth to offset pressures elsewhere, but
business voice service revenues continue to decline. There is
pressure in the fiber to the tower (FTTT) business that will
subside and this arises from the migration to fiber circuits from
copper circuits. Fiber provides greater capacity to customers at a
lower cost than copper but wireless customers' capacity needs
should grow longer term generating revenue growth. This pressure
should dwindle in 2015, and there will be modest competitive
pressure owing to the five to seven year nature of contracts.
REIT Formation: Upon the formation and spin-off of
Communications Sales & Leasing, Inc. (CS&L) into a newly
formed REIT, Windstream is expected to initially reduce debt by
approximately $3.4 billion. In return, Windstream will lease from
CS&L the spun-off fiber and copper assets for an initial
payment of $650 million annually. Windstream will also reduce its
dividend by 90%, with CS&L, in turn, focusing on high dividend
distributions as required by the REIT tax election.
Leverage: Windstream's gross leverage for 2014, excluding
non-cash actuarial losses on its pension plans and other
nonrecurring charges (merger and integration charges), was
4.05x.
Due to the reduction in debt following the REIT spin-off, Fitch
expects Windstream's gross debt leverage to be in the mid 3x range
in 2015, treating the lease as an operating lease. Total adjusted
debt to Operating EBITDAR is projected to approximate 4.9x, with
the lease being in place for part of the year, and 5.4x in 2016.
This adjusted leverage metric is above the median for other 'BB'
companies, and other telecom companies in the broader 'BB' range.
Offsetting factors to the higher lease adjusted leverage include
the reduction of outstanding senior secured and unsecured debt, and
the cash flow benefits arising from the reduction in interest
expense and common dividend. Windstream also has a moderately less
competitive footprint than its peers.
Free Cash Flow (FCF): FCF improved in 2014 on slightly lower
capital spending and as Windstream benefited from lower cash
interest expense. Fitch estimates 2015 post-dividend FCF will be
negative, in a range from $(200) million to $(250) million, as the
reduced dividend level is only in place for half the year, and due
to fees associated with the early extinguishment of debt and
formation of the REIT. In 2016, FCF is expected to be in the $75
million to $100 million range.
Liquidity: At Dec. 31, 2014, $625 million (prior to letters of
credit) was available on a $1.25 billion revolving credit facility.
Year-end cash totaled $28 million. Principal financial covenants in
Windstream's secured credit facilities require a minimum interest
coverage ratio of 2.75x and a maximum leverage ratio of 4.5x. The
dividend is limited to the sum of excess FCF and net cash equity
issuance proceeds subject to pro forma leverage of 4.5x or
less.
No Material Near-Term Maturities: There are no senior unsecured
notes maturing in 2015, with debt maturities consisting of bank
debt amortization as well as the maturity of the revolver in
December 2015. In 2016, the term loan A3 matures. Currently, there
is $344 million currently outstanding on the A3 tranche of the term
loan and it will be repaid prior to maturity through the
transactions related to the REIT spin-off. Fitch expects Windstream
will extend its revolver prior to the December 2015 maturity
concurrent with the REIT transaction.
KEY ASSUMPTIONS
--Fitch assumes the CS&L spin-off takes place in April 2015,
and planned debt reductions take place.
--For 2015, Fitch assumes Windstream's revenues will register a
slight decline, in the 1% to 2% range. Thereafter, Fitch expects
revenues to return to modest growth in 2017.
--The operating EBITDAR margin is expected to range between 36%
and 37% over the next few years.
--Capital spending in 2015 ranges from $825 million to $875
million, compared with $786 million in 2014. Cash taxes are
expected to be approximately $20 million.
RATING SENSITIVITIES
Positive Action: A positive action could occur if:
--Revenues and EBITDA stabilize or demonstrate a return to
growth on a sustained basis;
--Total adjusted debt/EBITDAR, which will be used as the primary
metric, is sustainable under 4.75x.
Negative Action: A negative rating action could occur if:
--Competitive and business conditions are such that the company
no longer makes progress toward revenue and EBITDA stability;
--Total adjusted debt/EBITDAR is 5.5x or higher on a
sustained.
Fitch has taken the following actions, including assigning
recovery ratings as follows. The Rating Outlook for all ratings
should remain Stable.
Windstream Services, LLC
--Long-term Issuer Default Rating (IDR) at 'BB';
--$1.25 billion senior secured revolving credit facility due
2015 at 'BBB-/RR1';
--$344 million senior secured credit facility, Tranche A3 due
2016 at 'BBB-/RR1';
--$255 million senior secured credit facility, Tranche A4 due
2017 at 'BBB-/RR1';
--$584 million senior secured credit facility, Tranche B5 due
2019 at 'BBB-/RR1';
--$1.318 billion senior secured credit facility, Tranche B4 due
2020 at 'BBB-/RR1'; and
--Senior unsecured notes at 'BB/RR4'.
Windstream Holdings of the Midwest
--IDR at 'BB';
--$100 million secured notes due 2028 at 'BB/RR4'.
PAETEC Holding Corp. (PAETEC)
--IDR at 'BB';
--$450 million senior unsecured notes due 2018 at 'BB/RR4'.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Telecommunications - Ratings Navigator Companion' (Nov. 17,
2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Telecommunications: Ratings Navigator Companion
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809869
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982078
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Fitch RatingsPrimary AnalystJohn C. Culver, CFASenior
Director+1-312-368-3216Fitch Ratings, Inc.70 W. Madison
StreetChicago, IL 60602orSecondary AnalystBill DensmoreSenior
Director+1-312-368-3125orCommittee ChairpersonMichael Paladino,
CFAManaging Director+1-212-908-9113orMedia Relations:Alyssa
Castelli, +1-212-908-0540alyssa.castelli@fitchratings.comElizabeth
Fogerty, +1-212-908-0526elizabeth.fogerty@fitchratings.com