Jan 8 - Fitch Ratings has assigned a 'BBB-' senior secured debt rating to
Windstream Corporation's (Windstream)(NASDAQ: WIN) proposed senior
secured term loan, which could total up to $300 million, and a 'BB+' to its
proposed offering of up to $700 million of senior unsecured notes. Windstream's
Issuer Default Rating (IDR) is 'BB+'. The Rating Outlook is Stable.
Proceeds from the offerings will be used to refinance existing debt and cover
related refinancing fees and expenses. The proceeds from the proposed Tranche B4
term loan will be used to repay the outstanding amounts on its existing Tranche
A2 and Tranche B term loans due in July 2013. The Tranche A2 and Tranche B term
loans had $20 million and $282 million, respectively, outstanding as of Sept.
30, 2012. Covenants on the new term loan will be consistent with its existing
credit agreement. Proceeds from the $700 million senior unsecured note offering
will be used to fund a tender offer for the $650 million of 8.875% senior
secured notes due 2017 previously issued by its subsidiary PAETEC Holding Corp.
(PAETEC). The refinancing will result in material interest expense savings.
Following the refinancing of the term loan, Windstream's only significant
maturity in 2013 consists of an $800 million senior unsecured note maturing in
August 2013. While Fitch believes Windstream will likely refinance the maturing
debt prior to August, Fitch believes the capacity available on its $1.25 billion
revolving credit facility (undrawn as of Sept. 30, 2012) provides the company
with the flexibility to repay the $800 million due if market conditions do not
permit refinancing prior to that date.
KEY RATING DRIVERS
Key rating factors which support the rating include:
--Expectations for the company to generate strong operating and free cash flows
and to have access to ample liquidity;
--Revenues have become more diversified as recent acquisitions have brought
additional business and data services revenue. Following the fourth quarter 2011
acquisition of PAETEC, business service and consumer broadband revenues, which
both have solid growth prospects, were 69% of revenues in the third quarter of
--Prospects for improved free cash flow as certain investments wind down in
The following concerns are embedded in the ratings:
--Higher leverage, which is expected to moderate through merger-related and
other cost savings and debt reduction;
--Competition for consumer voice services;
--Integration risk, which is moderated by the company's experience in acquiring
and incorporating small- and medium-sized acquisitions.
Pro forma for the PAETEC acquisition and excluding noncash actuarial losses on
its pension plans, latest 12 months (LTM) leverage as of Sept. 30, 2012 was
3.75x (3.70x on a net leverage basis), somewhat above the upper end of the
company's net leverage target of 3.2x-3.4x. Fitch also believes leverage is
slightly high for the current rating category.
For 2012, Fitch estimates leverage approximated 3.7x, and expects leverage to
approximate 3.4x by 2013. Moderate EBITDA growth -- due to modest revenue growth
and synergies from the PAETEC acquisition -- as well as debt reduction, support
prospective leverage improvements. Approximately $50 million in cost savings
from the PAETEC acquisition remain to be achieved in 2013, and a management
reorganization completed in the third quarter of 2012 is expected to lead to
approximately $40 million in annual cost savings. Acquisitions, which have
pushed leverage higher, have diversified the company's revenue stream and
improved its growth prospects.
On Sept. 30, 2012, Windstream had $1.235 billion available on its $1.25 billion
revolver due December 2015, net of letters of credit, and $115 million of cash
on its balance sheet. 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
free cash flow and net cash equity issuance proceeds subject to pro forma
leverage of 4.5x or less.
As of Sept. 30, 2012, debt maturities, including bank debt amortization, for the
remainder of 2012 were nominal, and approximately $1.2 billion in 2013. Fitch
estimates free cash flow (after dividends) for Windstream was in the $225
million to $275 million range in 2012. The company's guidance called for capital
spending in the $1.005 billion to $1.105 billion range, including PAETEC
integration capital spending. Fitch expects capital spending to be approximately
$200 million lower in 2013 as spending on fiber to the tower projects and the
company's portion of broadband stimulus investments winds down. Cash taxes are
expected to remain low in 2013 (in the range of $40 million to $50 million), as
tax planning and the American Taxpayer Relief Act of 2012 will cause 2013 cash
taxes to be lower than previously expected by approximately $200 million, but
higher than 2012 when there was a modest cash tax benefit.
WHAT COULD TRIGGER A RATING ACTION
A negative rating action would be driven by the company's inability to reduce
leverage. Although many of Windstream's recent transactions have included an
equity component, leverage is slightly high. The company must achieve
transaction synergies and moderately reduce debt to return leverage to 3.5x or
below by the end of 2013 to avoid a Negative Outlook.
A positive rating action would require the company to maintain leverage at or
below 2.5x and to maintain a dividend payout of predividend free cash flow at a
rate of 55% or less, in combination with a return to consistent revenue growth.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Telecom Companies