CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Windstream Corporation (Windstream) and its subsidiaries to 'BB' from 'BB+'. Windstream is a wholly-owned subsidiary of Windstream Holdings, Inc. (NASDAQ: WIN). The Rating Outlook has been revised to Stable from Negative. A list of affected issuers is at the end of the release.
KEY RATING DRIVERS
The downgrade reflects Fitch's revised expectations that Windstream's gross leverage will no longer improve to a level of 3.5x or below within a 12-to-18-month time horizon. Fitch anticipates the company will continue to make progress in reducing debt but that slower than previously expected growth in business service revenue has not fully offset pressures elsewhere. As a result, the pace of improvement in revenues, EBITDA and free cash flow (FCF) has been hampered.
Key rating factors which support the rating include:
--Expectations for the company to generate improved FCF in 2014 as certain capital spending projects wind down;
--Revenues have become more diversified as recent acquisitions have brought additional business and data services revenue.
Business service and consumer broadband revenues, which both have stable or solid growth prospects, were 72% of revenues in the third quarter of 2013.
The following issues are embedded in the rating:
--Windstream's leverage, which Fitch expects to be in the 3.7x to 3.8x range on a gross basis in 2014, is likely to decline slowly over time, but in the near term remain in a range appropriate for the new 'BB' category;
--Moderate pressure on EBITDA hinders improvements in leverage. The company has produced cost savings through lower interconnection rates, but the expense savings have only partly offset the loss of high-margin legacy service revenues.
Windstream's gross leverage for the latest 12 months (LTM) as of Sept. 30, 2013, excluding non-cash actuarial losses on its pension plans and other nonrecurring charges (merger and integration charges), was 3.75x (3.71x on a net leverage basis), above the upper end of the company's net leverage target of 3.2x-3.4x.
On Sept. 30, 2013, Windstream's $1.25 billion revolver due December 2015 had $700 million outstanding, and $533 million was available (net of letters of credit) and the company had $87 million of cash on its balance sheet (including $14 million of restricted cash primarily related to broadband stimulus projects). 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.
As of Sept. 30, 2013, there are no senior unsecured note maturities during 2014 and 2015. Debt maturities consist of bank debt amortization, as well as the maturity of the revolver in December 2015. Fitch expects the company to reduce revolver borrowings as FCF is generated. Fitch estimates FCF (after dividends) for Windstream will be in the $250 million to $300 million range in 2014. Fitch estimates 2014 capital spending could approximate the amount spent in 2013, which Fitch estimates was around the $850 million level.
RATING SENSITIVITIES
A positive rating action could occur if:
--Leverage becomes sustainable in the 3.2x to 3.5x range on a gross basis;
--Revenues and EBITDA stabilize or demonstrate a return to growth on a sustained basis.
A negative rating action could occur if:
--Leverage is expected to be 4.0x or higher for a sustained period;
--Competitive and business conditions are such that the company no longer makes progress toward revenue and EBITDA stability.
Fitch has taken the following actions and revised the Rating Outlook to Stable from Negative:
Windstream Corporation
--Long-term IDR downgraded to 'BB' from 'BB+';
--$1.25 billion senior secured revolving credit facility due 2015 affirmed at 'BBB-';
--$393 million senior secured credit facility, Tranche A3 due 2016 affirmed at 'BBB-';
--$281 million senior secured credit facility, Tranche A4 due 2017 affirmed at 'BBB-';
--$592 million senior secured credit facility, Tranche B3 due 2019 affirmed at 'BBB-';
--$1.345 billion senior secured credit facility, Tranche B4 due 2020 affirmed at 'BBB-'; and
--Senior unsecured notes downgraded to 'BB' from 'BB+'.
Windstream Georgia Communications
--IDR downgraded to 'BB' from 'BB+' and withdrawn as there is no longer outstanding long-term debt.
Windstream Holdings of the Midwest
--IDR downgraded to 'BB' from 'BB+';
--$100 million secured notes due 2028 downgraded to 'BB' from 'BB+'.
PAETEC Holding Corp. (PAETEC)
--IDR downgraded to 'BB' from 'BB+';
--$450 million senior unsecured notes due 2018 downgraded to 'BB' from 'BB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Rating Telecom Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820995
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