Fitch Rates Windstream's Proposed Debt Offering 'BB+'; Outlook Negative

Mon Aug 12, 2013 2:16pm EDT

(The following statement was released by the rating agency) CHICAGO, August 12 (Fitch) Fitch Ratings is rating Windstream Corporation's (Windstream; NASDAQ: WIN) proposed re-opening of up to $500 million of 7.75% senior unsecured notes due 2021 'BB+'. Windstream's Issuer Default Rating (IDR) is 'BB+'. The Rating Outlook is Negative. Proceeds from the $500 million senior unsecured note offering will be used to fund a tender offer for the $500 million of 7% senior unsecured notes due 2019. The company is tendering for the 2019 notes which are the only series of outstanding notes that do not have a ratings-change triggering event as part of their change of control covenant. Windstream has disclosed that it is evaluating the formation of a holding company, which would be a change of control. If implemented, Windstream Corporation would become a subsidiary of the holding company. Fitch believes the formation of the holding company is neutral to Windstream's credit profile, as Windstream would continue to be the primary obligor for the currently outstanding debt. KEY RATING DRIVERS Key rating factors which support the rating include: --Expectations for the company to generate improved free cash flow (FCF) in 2013 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 71% of revenues in the second quarter of 2013. The following issues are embedded in the Negative Outlook: --Windstream's high leverage, which is expected to moderate at a slower pace than previously expected; --Moderate pressure on EBITDA, which is hindering improvements in leverage. Pressure is arising primarily from declines in high-margin intercarrier compensation revenues and higher spending on enterprise sales initiatives in 2013; --Competition for consumer voice services. Windstream's gross leverage for the latest 12 months (LTM) as of June 30, 2013, excluding noncash actuarial losses on its pension plans and other nonrecurring charges (merger and integration charges), was 3.89x (3.85x on a net leverage basis), above the upper end of the company's net leverage target of 3.2x-3.4x. Fitch also believes leverage is high for the current rating category. For 2013, Fitch estimates Windstream's gross leverage will be in the 3.8x range. While Fitch expects debt to decline as FCF is applied to reducing debt, an expected moderate decline in EBITDA leads to only a slight improvement in leverage. Pressure on EBITDA is expected to be only partially offset by known cost reductions. A modest amount of cost savings from the PAETEC acquisition remain to be achieved in 2013, and there will be incremental effects of a management reorganization completed in the third quarter of 2012 that has resulted in approximately $40 million in annual cost savings. On June 30, 2013, Windstream's $1.25 billion revolver due December 2015 was undrawn, and $1.234 billion was available (net of letters of credit) and the company had $93 million of cash on its balance sheet (including $15 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 June 30, 2013, debt maturities over 2013 and 2014, excluding bank debt amortization, are $810 million in 2013, and none in 2014. The company repaid $800 million maturing on Aug. 1, 2013 with cash on hand and drawings on its revolver, leaving $10 million maturing during the remainder of 2013. Fitch expects the company to reduce revolver borrowings as FCF is generated. Fitch estimates FCF (after dividends) for Windstream will be in the $275 million to $325 million range in 2013. The company's guidance calls for 2013 capital spending in the $840 million to $855 million range, down from approximately $1.1 billion in 2012 (including PAETEC integration capital spending). Capital spending declines in 2013 as spending on fiber to the tower projects declines and as PAETEC integration capital spending is nominal. Cash taxes are expected to remain low in 2013 (approximately $20 million, revised down in the second quarter from a range of $37 million to $42 million previously), but rise in 2014. RATING SENSITIVITIES The Rating Outlook could be revised to Stable if: --Leverage is on a path to decline to 3.5x or below by the end of 2014; --Revenues and EBITDA stabilize or demonstrate a return to growth on a sustained basis by mid-2014. A negative rating action could occur if: --Leverage is expected to remain above 3.5x; --Revenues and EBITDA continue to decline in 2014, thus inhibiting the pace of potential delevering. Contact: Primary Analyst John C. Culver, CFA Senior Director +1-312-368-3216 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Bill Densmore Senior Director +1-312-368-3125 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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 here Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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