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Fitch Affirms Uniti Group Inc. at 'BB-'; Outlook Stable
March 14, 2017 / 2:19 PM / 8 months ago

Fitch Affirms Uniti Group Inc. at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, March 14 (Fitch) Fitch Ratings has affirmed the ratings of Uniti Group Inc. (formerly Communications Sales & Leasing, Inc.) and its co-issuer CSL Capital, LLC including the Issuer Default Ratings (IDRs) at 'BB-'. The Rating Outlook is Stable. See the full list of ratings at the end of this release. KEY RATING DRIVERS Slight Rise in Leverage: Uniti's gross leverage has increased slightly as a result of the May 2016 PEG Bandwidth acquisition and the August 2016 Tower Cloud acquisition. For 2016, gross leverage (total debt/EBITDA) was approximately 6.2x according 50% equity treatment for the preferred stock issued in the PEG Bandwidth transaction. Based on management comments about opportunities within a robust transaction pipeline and desire to diversify across various asset classes, Fitch anticipates that Uniti will announce further transactions over time. As these opportunities come to fruition, Fitch expects Uniti to finance transactions such that gross leverage would remain relatively stable and should remain in the high-5x range over the longer term. Very Stable Cash Flow: A substantial portion of Uniti's current revenues are generated under a master lease with Windstream Holdings, under which Windstream has exclusive access to the assets. The lease currently produces slightly more than $650 million in cash revenues annually. Fitch expects Uniti to have very stable cash flows, owing to the fixed (and modestly increasing) nature of the long-term lease payments from Windstream and the contractual nature of the revenue streams in Uniti's operating businesses. The term of the master lease is for an initial term of 15 years (to 2030). There is some risk at renewal that under the "any or all" provision at renewal Windstream could opt not to renew certain markets, or renegotiate terms at such time for those markets. However, this renewal risk is well into the future, given the initial 15-year term. Fitch expects all markets to be renewed under the master lease, since Windstream would either incur significant capital expenditures to overbuild Uniti or find a buyer for its operating assets (routers, switches, etc.) and successor tenant for its leased assets. Protection is provided to Uniti by the terms of the master lease, which could require Windstream to sell its operating properties in the event of default. Uniti's facilities would be essential to the operations of Windstream on a going-concern basis, or to a successor company. Relatively New Business Model: Under the master lease, Uniti owns mainly fiber and copper assets that it leases back to Windstream on an exclusive basis. Windstream continues to operate the retail business and owns all of the electronics associated with providing telecom services. Tenant Concentration: The master lease with Windstream (Long-Term IDR 'BB-') provides approximately 76% of Uniti's revenues on a pro forma basis for the recently announced Hunt acquisition. At the spin-off, nearly all revenues were from Windstream and Uniti's IDR was initially capped at the same level as Windstream's. In Fitch's view, the improved diversification is a positive for Uniti's credit profile. Seniority: Fitch notes that Uniti's master lease is with Windstream Holdings (Holdings) and that Holdings is subordinate to the operations at Windstream Services. However, we believe Uniti's assets will be essential to Windstream Services operations and a priority payment. Geographic Diversification: In Fitch's view, Uniti's geographic diversification is solid, given Windstream's geographically diverse operations and the expanded footprint provided by recent acquisitions, primarily PEG Bandwidth and Tower Cloud. KEY ASSUMPTIONS --Fitch expects Uniti's revenue to grow approximately 14% to 16% in 2017 owing to acquisitions in 2016 and the 2017 Hunt acquisition which Fitch assumes will close in 3Q17. --Fitch expects margins to decline due to acquisitions of operating businesses and the low initial margins in the tower business (these margins improve as tenants are added). --Fitch has assumed Uniti will continue to be acquisitive and that it will fund transactions with a mix of debt and equity that can maintain relatively stable credit metrics. --Uniti will target long-term net leverage in the mid-5x range; Fitch expects gross leverage to be in the high-5x range. --Fitch expects capital spending in the $95 million to $115 million range in line with company guidance on spending for Uniti Fiber and Uniti Towers, and a nominal amount of spending in the consumer CLEC business and other areas. RATING SENSITIVITIES Positive Rating Action: A positive action is unlikely in the absence of an upgrade of Windstream, although an upgrade could be considered if Uniti targets debt leverage of 5.2x to 5.3x or lower and 25%-30% of its revenue and EBITDA is derived from tenants with a credit profile materially stronger than Windstream's. Negative Rating Action: A negative rating action could occur if debt leverage is expected to be 6x or higher for a sustained period. In addition, a downgrade of Windstream would likely result in a similar downgrade of Uniti in the absence of greater revenue diversification. Also, the acquisition of assets and subsequent leases to tenants that have a weaker credit and operating profile than Windstream could affect the rating, if such assets are a material proportion of revenues. LIQUIDITY Liquidity Profile: Uniti's $500 million revolving credit facility (RCF; due 2020), which had $500 million available on Dec. 31, 2016, provides sufficient backstop for liquidity needs. Fitch expects Uniti will restore revolver availability following transactions by terming out borrowings over time by more permanent means of equity and debt funding. The company had $172 million in cash at Dec. 31, 2016. In February 2017, the company completed a repricing of the term loan, reducing the interest rate 50bps to LIBOR plus 3.00%. The repricing will save $10 million annually. Other than the RCF, which matures in 2020, there are no major maturities until 2022 when the $2.1 billion term loan matures. At-the-Market Common Stock Offering Program: Uniti has an ATM program that allows for the issuance of up to $250 million of common equity to keep the capital structure in balance when funding capital expenditures in the tower or fiber operating businesses as well as to finance small transactions. Fitch has affirmed the following ratings for Uniti and CSL Capital, LLC: --Long-Term IDR at 'BB-'; --Senior secured revolving credit facility due 2020 at 'BB+/RR1'; --Senior secured term loan credit facility due 2022 at 'BB+/RR1'; --Senior secured notes at 'BB+/RR1'; --Senior unsecured notes at 'BB-/RR4'. Contact: Primary Analyst John Culver, CFA Senior Director +1-312-368-3216 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Constance McKay Associate Director +1-312-368-3148 Committee Chairperson David Peterson Senior Director +1-312-368-3177 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Fitch gives Uniti preferred stock 50% equity treatment. Key attributes for the instrument include the ability to defer coupon payments, cumulative nature of the dividend, effective maturity of at least five years and no coupon step-ups. Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Recovery Ratings and Notching Criteria for Equity REITs (pub. 16 Nov 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020529 Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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