Reuters logo
Fitch Maintains Windstream's IDR and Related Issue Ratings on Rating Watch Negative
October 20, 2017 / 2:41 PM / a month ago

Fitch Maintains Windstream's IDR and Related Issue Ratings on Rating Watch Negative

(The following statement was released by the rating agency) CHICAGO, October 20 (Fitch) Fitch Ratings has maintained the Long-Term Issuer Default Ratings (IDRs) and issue ratings of Windstream Services, LLC and its subsidiary, Windstream Holdings of the Midwest, Inc. (WHM) on Rating Watch Negative following the company's announcement of debt-exchange offers. A full list of rating actions follows at the end of this release. Fitch does not consider the proposed debt exchange as a distressed debt exchange (DDE), since the offers do not result in a material reduction in the terms compared with the original contractual terms on the offered notes. The new 6 3/8 notes will be exchanged at a premium that more than offsets the reduction in coupon. The exchange for the new 8.625% secured notes is at a discount but is accompanied by a higher coupon rate and a higher ranking in priority of payments within the capital structure. On Oct. 18, 2017, Windstream announced certain debt offers and consent solicitations with respect to the company's 7.75% senior notes maturing in 2020 (the 2020 notes), 7.75% senior notes maturing in 2021 (the 2021 notes), 7.5% senior notes maturing 2022 (the 2022 notes) and 7.5% senior notes maturing in 2023 (the 2023 notes). The 2022 notes and 2023 notes are offered in exchange for the new 6 3/8% notes maturing in 2023. The offer for the 2021 notes provides an option to exchange for new 6 3/8% notes or new 8.625% senior secured notes, subject to certain conditions. The 2020 notes are offered in exchange for the new 8.625% senior secured notes, subject to a cap of $50 million on the aggregate amount issued in exchange for 2020 notes. Fitch's Distressed Debt Exchange Rating Criteria provides that a debt restructuring is classified as a DDE when both the following conditions apply: the restructuring imposes a material reduction in terms compared with the original contractual terms; and the restructuring or exchange is conducted to avoid bankruptcy, similar insolvency or intervention proceedings, or a traditional payment default. Windstream has also solicited consents from holders of the aforesaid notes for waiver of the alleged defaults with respect to spin-off transactions with Uniti Group, Inc. and amend indentures governing these notes to give effect to such waivers and amendments. Fitch placed Windstream on Rating Watch Negative on Sept. 27, 2017 in connection with the receipt of the notice of default. Windstream is defending the allegations and has filed a legal proceeding on the matter. Fitch will resolve the Negative Watch following the resolution of the pending litigation and conclusion of the debt-exchange offer. KEY RATING DRIVERS Near-Term Pressures: Excluding the transactions, Windstream experienced a decline of 3.4% in service revenue in 2016. Sequential revenues have been relatively stable in the ILEC consumer and small/medium business segment, and the enterprise segment. The company has experienced some pressure in the wholesale segment, as well as the small/medium business competitive local exchange carrier segment. Including the transactions, Fitch's base case assumes organic revenues continue to decline over the forecast horizon, albeit at a slowing pace. Revenue Mix Changes: Windstream derives approximately two-thirds of its revenue from enterprise services, consumer high-speed internet services and its carrier customers (core and wholesale), which all have growing or stable prospects for the long term. Certain legacy revenues remain pressured, but Windstream's revenues should stabilize gradually as legacy revenues dwindle in the mix. Leverage Metrics: Fitch estimates total adjusted debt/EBITDA will be 5.8x in 2017, including the EarthLink merger and Broadview acquisition. Fitch expects total adjusted debt/EBITDA will decline to around mid-5x by the end of 2018 as cost synergies are realized from both transactions and remain relatively flat over the remainder of the forecast horizon. In calculating total adjusted debt, Fitch applies an 8x multiple to the sum of the annual rental payment to Uniti Group Inc. plus other rental expenses. Cost Synergies Support EBITDA Stabilization: Windstream anticipates realizing more than $180 million of annual run-rate synergies three years after the close of the EarthLink merger and Broadview Networks acquisition (the transactions): $155 million in operating cost savings and $25 million in capital spending savings. Windstream expects to realize $115 million in operating cost synergies after two years following the transactions, with roughly $40 million-$50 million to be realized by the end of year three. In its base case assumptions for Windstream, Fitch has assumed moderately lower cost savings in each of the three years following the transactions. Integration Key to Success: Fitch believes there are potential execution risks to achieving the operating cost and capital expenditure synergies following the close of the transactions. Initial savings are expected to be realized from reduced selling, general and administrative savings as corporate overheads and other public company cost savings arise. Over time, the company is expected to realize the benefits of lower network access costs as on-network opportunities lower third-party network access costs. Finally, cost savings are gradually expected to be realized by IT and billing systems. DERIVATION SUMMARY Windstream has a weaker competitive position based on scale and size of its operations in the higher-margin enterprise market. Larger companies, including AT&T Inc. (A-/RWN), Verizon Communications Inc. (A-/Stable), and CenturyLink, Inc. (BB+/RWN), have an advantage with national or multinational companies given their extensive footprints in the U.S. and abroad. Fitch notes that CenturyLink will become the second-largest enterprise service provider after it acquires Level 3 Communications, Inc. (LVLT; BB/Stable), which is expected to close at the end of third quarter 2017 (3Q17). In comparison to Windstream, AT&T and Verizon maintain lower financial leverage, generate higher EBITDA margins and FCF, and have wireless offerings that provide more service diversification. Fitch also believes Windstream will have a weaker FCF profile than CenturyLink following the LVLT acquisition, as CenturyLink's FCF will benefit from enhanced scale and LVLT's net operating loss carryforwards. Windstream has less exposure to the more volatile residential market compared to its rural local exchange carrier (RLEC) peer, Frontier Communications Corp. (B+/Stable). Within the residential market, RLECs face wireless substitution and competition from cable operators with facilities-based triple-play offerings, including Comcast Corp. (A-/Stable) and Charter Communications Inc. (Fitch rates Charter's indirect subsidiary, CCO Holdings, LLC, BB+/Stable). Cheaper alternative offerings such as Voice over Internet Protocol (VoIP) and over-the-top (OTT) video services provide additional challenges. RLECs have had modest success with bundling broadband and satellite video service offerings in response to these threats. As of year-end 2016, roughly 60% of Windstream's footprint overlapped with a national cable operator. No country-ceiling, parent/subsidiary or operating environment aspects affect the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Revenue and EBITDA include the EarthLink merger as of Feb. 27, 2017 and the acquisition of Broadview on July 28, 2017. --Revenues total $5.9 billion and $6 billion in 2017 and 2018, respectively. Fitch expects organic revenue to continue to decline over the forecast horizon, albeit at a slowing pace. --2017 EBITDA margins are in the range of 22%-23%, including the annual rental payment as an operating expense. Fitch expects EBITDA margins to expand by roughly 100bps in 2018 as Windstream cost synergies are realized. --Fitch assumes Windstream will benefit from synergies post-acquisition, and has moderately reduced the amount of operating cost synergies from the $155 million anticipated by Windstream over the next three years. --Fitch expects total adjusted debt/EBITDA will decline from 5.8x at year-end 2017 to around mid-5x range by the end of 2018 as cost synergies are realized from both transactions. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --The company sustains total adjusted debt/EBITDAR under 5.5x. Fitch has revised the negative leverage threshold down to 5.5x from 5.7x-5.8x owing to the challenging competitive and business environment. --Revenues and EBITDA would need to stabilize on a sustained basis. --Fitch would also need to see progress by Windstream on executing the integration of its recent transactions prior to stabilizing the rating. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --A negative rating action could occur if total adjusted debt/EBITDAR is 5.5x or higher for a sustained period. --The company no longer makes progress toward revenue and EBITDA stability due to competitive and business conditions. --Any negative developments related to the outcome of the receipt of notice of default. LIQUIDITY The rating is supported by the liquidity provided by Windstream's $1.25 billion revolving credit facility (RCF). At June 30, 2017, approximately $475 million was available. The revolver availability was supplemented with $25 million in cash at the end of 2Q17. The $1.25 billion senior secured RCF 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. Outside of annual term-loan amortization payments, Windstream does not have any material maturities until 2020, when they total $769 million, including $750 million outstanding on the revolver at June 30, 2017. Fitch estimates post-dividend FCF in 2017 will range from $0 to negative $50 million, including integration capex and $50 million of spending related to the completion of Project Excel. Fitch expects capital spending to return to normal levels in the 13%-15% range after 2017 and for the company to return to positive FCF in 2018, with FCF margins in the low single digits over the forecast. FULL LIST OF RATING ACTIONS Fitch maintains the following ratings on Rating Watch Negative: Windstream Services, LLC --Long-Term IDR 'BB-'; --$1.25 billion senior secured revolving credit facility due 2020 'BB+/RR1'; --Senior secured term loans 'BB+/RR1'; --Senior unsecured notes 'BB-/RR4'. Windstream Holdings of the Midwest, Inc. --Long-Term IDR 'BB-'; --$100 million secured notes due 2028 'BB-/RR4'. Contact: Primary Analyst Salonie Sehgal Associate Director +1-312-368-3137 Fitch Ratings, Inc. 70 W. Madison St. Chicago IL 60602 Secondary Analyst John Culver, CFA Senior Director +1-312-368-3216 Committee Chairperson David Peterson Senior Director +1-312-368-3177 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 has adjusted the financial statements to treat the communications network lease as an operating lease. On the income statement, the network lease has been added as rent expense and the interest associated with the lease was removed from interest expense. On the cash flow statement, rent expense was moved to "Operating cash flows" from "Financing cash flows". Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Distressed Debt Exchange Rating Criteria (pub. 13 Jun 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Solicitation Status here#solicitation 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. 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below