CHICAGO--(BUSINESS WIRE)--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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