CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the Issuer Default Rating (IDR) to 'BB-' from 'BB' for Windstream Services, LLC (Windstream) and its subsidiaries.
Fitch has also downgraded and withdrawn the IDR at Windstream's subsidiary, PAETEC Holding Corp., following the repayment of its outstanding debt.
Fitch has assigned a 'BB+/RR1' rating to Windstream's $400 million senior secured Term Loan B due 2021. Proceeds from the issuance will be used to fund a tender for up to $350 million of the company's 7.875% senior unsecured notes due 2017. Windstream is a wholly-owned subsidiary of Windstream Holdings, Inc. (NASDAQ: WIN).
The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
The downgrade stems from Fitch's expectations that Windstream will be above Fitch's revised total adjusted debt/EBITDAR threshold for the 'BB' rating category. Fitch has revised its rating sensitivities for Windstream and other wireline-only operators to reflect the continued secular effects of competition, which, in turn, has led to continued delays in the return to revenue and EBITDA stability. For Windstream, Fitch's previous base case reflected EBITDAR to return to growth in 2017; the current case reflects 2018. Similarly, Fitch previously expected revenue growth to turn positive after 2016; the current base case reflects revenues to return to growth in 2019.
Fitch had previously indicated total adjusted debt/EBITDAR that exceeded 5.5x would lead to a negative rating action at the 'BB' IDR level. This metric has been revised to 5.25x, and Fitch expects Windstream to be above this level through at 2017, thus leading to the downgrade. In calculating total adjusted debt, Fitch applies an 8x multiple to the sum of the annual rental payment to Communications Sales and Leasing, (CSAL) plus other rental expense.
KEY RATING DRIVERS
Revenue Mix Changes: Windstream derives approximately 66% of revenue from enterprise services, consumer high-speed internet services and its carrier customers (core and wholesale), which all have growing or stable prospects. Certain legacy revenues remain pressured, but revenues should stabilize as they dwindle in the mix.
Near-Term Pressures: Windstream experienced a nominal 0.5% decline in service revenue in 2015, mainly due to voice services declines, pressure on its wireless TDM revenues and lower small business CLEC revenues.
Leverage: Fitch expects 2016 total adjusted debt/EBITDAR to be approximately 5.7x in 2016, and approximately 5.5x in 2017. Fitch has assumed the remaining stake in CSAL will be sold in 2017; if the stake is sold in 2016, the adjusted leverage metric for 2016 could be less than Fitch's 5.7x estimate but would result in little change to the 2017 estimate.
Fitch's key assumptions within the rating case for the issuer include:
--In 2016, Fitch has assumed service revenues will approximate the mid-point of Windstream's guidance of $5.275 billion to $5.425 billion. In 2017, Fitch has assumed revenues decline in the 1% to 2% range, with revenues flat in 2018.
--2016 and 2017 EBITDA margins, including the annual rental payment as an operating expense, are in the 23% to 24% range.
--In 2016, capital spending per company guidance and including $200 million for Project Excel ranges from $1 billion to $1.05 billion. Cash taxes are not expected to be material. Capital intensity in 2017 is expected to be in the 15% to 16% range, and includes Connect America Fund II spending.
Positive Trigger: A positive action could occur if total adjusted debt/EBITDAR, which will be used as the primary metric, is sustainable under 5.25x. Additionally, revenues and EBITDA would need to stabilize or demonstrate a return to growth on a sustained basis.
Negative Trigger: A negative rating action could occur if total adjusted debt/EBITDAR is 5.75x or higher for a sustained period, or if competitive and business conditions were such that the company no longer makes progress toward revenue and EBITDA stability.
Improved Maturity Profile: The term loan is expected to further reduce Windstream's 2017 senior unsecure debt maturities. At yearend 2015, Windstream had $904 million outstanding in 2017 maturities, and further reduced this amount by $94 million using revolver borrowings. The $350 million tender offer will further reduce the 2017 maturities to $461 million on a pro forma basis. Fitch believes Windstream will have the flexibility to reduce this amount via revolver borrowings. In addition, liquidity will be provided by the monetization of the remaining stake in CSAL. Current market values of the stake are above the fair market value of $549 million at yearend 2015. There are no major maturities in 2018.
Liquidity Solid: Supporting the rating is the liquidity provided by Windstream's $1.25 billion revolving credit facility. At Dec. 31, 2015, approximately $927 million was available. The revolver availability was supplemented with $31 million in cash at yearend 2015.
Credit Facility: The $1.25 billion senior unsecured revolving credit facility is in place until April 2020. 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.
In 2015, Fitch expects post-dividend FCF to range from a negative $150 million to negative $200 million, including expected spending of $200 million on Windstream's Project Excel.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
Windstream Services, LLC
--Long-term IDR to 'BB-' from 'BB';
--$1.25 billion senior secured revolving credit facility due 2020 to 'BB+/RR1' from 'BBB-/RR1';
--$578 million senior secured credit facility, Tranche B5 due 2019 to 'BB+/RR1' from 'BBB-/RR1';
--Senior unsecured notes to 'BB-/RR4' from 'BB/RR4'.
Windstream Holdings of the Midwest
--Long-term IDR to 'BB-' from 'BB';
--$100 million secured notes due 2028 to 'BB-/RR4' from 'BB/RR4'.
Fitch has downgraded and withdrawn the following ratings:
PAETEC Holding Corp. (PAETEC)
--Long-term IDR to 'BB-' from 'BB' and withdrawn.
Fitch has assigned the following ratings:
Windstream Services, LLC
--$400 million senior secured credit facility, Tranche B due 2021 rated 'BB+/RR1'.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 07 Dec 2015)
Dodd-Frank Rating Information Disclosure Form