S&P Affirms Ratings on Windstream (WIN); Places on CreditWatch Positive Following REIT Spin Plans Jul 29, 2014 12:24PM

Standard & Poor's Ratings Services today affirmed its 'BB-' corporate credit rating on Little Rock, Ark.-based telecommunications provider Windstream Holdings Inc. (Nasdaq: WIN). The outlook is stable.

At the same time, we placed the 'B' issue-level rating on Windstream's senior unsecured debt on CreditWatch with positive implications. We expect to raise the issue-level rating on the unsecured debt by one notch when the transaction closes.

This action follows the company's announcement that it will spin off a portion of its fiber and copper plant assets, along with its consumer CLEC business, into a REIT. Under the transaction, Windstream will enter into a long-term triple net exclusive lease with the REIT with an initial rent payment of about $650 million per year. Windstream will operate and maintain the assets. The company expects the REIT will raise about $3.5 billion of new debt, which they will use to repay about $3.2 billion of existing debt at Windstream, resulting in a modest reduction in reported leverage. Completion of the proposed spin-off is subject to regulatory approvals and is expected to close in the first quarter of 2015.

The rating affirmation reflects our view, that in aggregate, the transaction does not materially benefit or worsen the company's overall credit quality.

Our assessment is based on the following factors:

  • Windstream's discretionary cash flow (DCF) will improve because of its planned dividend reduction and lower cash tax payments, which more than offset lower EBITDA as a result of the lease payments.
  • Standard & Poor's adjusted leverage will be higher because of an increase in debt-like obligations associated with the long-term master lease, under which Windstream will manage and operate the fiber and copper assets. We expect leverage above 5x, pro forma for the transaction, although we still view the company's financial risk profile as "aggressive" based on cash flow metrics, including DCF to debt.
  • We believe that the large fixed-rent expense that Windstream will pay to the REIT will reduce Windstream's operating flexibility and potentially lead to greater volatility in cash flows, particularly if operating conditions deteriorate. However, these factors are not sufficient to revise our "fair" business risk assessment.
Our CreditWatch listing on Windstream's senior unsecured debt reflects our expectation for improved recovery prospects due to a significant reduction in secured debt as part of the transaction.

We expect to rate the REIT 'BB-', primarily reflecting the default risk of Windstream and the very high cash flow stability because of the fixed rental payment that it will receive, which provides it with a degree of insulation from potential revenue and EBITDA declines at Windstream. These factors are partially offset by the concentrated counterparty risk in one tenant. We expect that pro forma leverage will be around 5.5x for the REIT.


Windstream (WIN), CenturyLink (CTL), Frontier (FTR) Credit Raised to Overweight at Citi on WIN REIT Plan Jul 29, 2014 12:01PM

Citi's credit analysts upgrade the wire line sector to Overweight from Marketweight owing to a new path to deleveraging, relatively stable business platforms, and relative value.

"We had expected Windstream (NYSE: WIN) to announce a transaction, but thought a leveraging deal for a growing business was most likely," analyst David Phipps said. "What WIN announced was a REIT spin-off which reduces the dividend and employs tax efficiency strategies. Specifically, WIN will create an OpCo – PropCo set of companies and in the process plans to reduce OpCo debt by over $3 billion and leverage by 0.6x to 3.3x. For credit investors, this is a credit positive surprise and we believe this can be extended to other wire line operators."

Windstream (NYSE: WIN): Credit Implications — We raise our weighting to Overweight from Marketweight on WIN credit owing to the announced deleveraging transaction, relatively stable fundamentals, relative value and potential for future growth.

CenturyLink (NYSE: CTL) Credit Implications — We raise our weighting to Overweight from Marketweight on CTL credit owing to the announced WIN deleveraging transaction. We believe other telecom companies could adopt this credit enhancing transaction. Additionally, CTL has relatively stable fundamentals and attractive relative value.

Frontier (NYSE: FTR) Credit Implications — We raise our weighting to from Marketweight on FTR credit owing to the announced WIN deleveraging transaction. We believe other telecom companies could adopt this credit enhancing transaction. Additionally, FTR has relatively stable fundamentals and attractive relative value.


Family Dollar (FDO) Placed on CreditWatch Negative by S&P (DLTR) Jul 29, 2014 09:51AM

Standard & Poor’s Ratings Services today placed all its ratings on Family Dollar Stores Inc. (NYSE: FDO), including the ‘BBB-’ corporate credit rating and ‘BBB-’issue-level rating on the company’s senior unsecured notes, on CreditWatch with negative implications.

The CreditWatch placements come after Dollar Tree Inc. (Nasdaq: DLTR) agreed to purchase Family Dollar Stores Inc., a large part of which will be funded with debt and thereforeweaken credit ratios materially. Assuming Dollar Tree finances the acquisition using the $5.4 billion term loan, $2.8 billion in senior unsecurednotes, and at least a portion of the $1.25 billion revolver outlined publically today, pro forma leverage would approach the 5.0x range. "We expectwe could rate the combined company as high as the mid-'BB' category, but we need to assess integration costs, and potential synergies as part of the transaction," said Standard & Poor's credit analyst Diya Iyer. "Currently, we expect the potential outcome for the corporate credit rating to be, on the lowend, in the single ‘B’ category."

The acquisition announcement comes after activist investor Carl Icahn’s push for a sale of Family Dollar earlier in the year amid lackluster operating performance, higher-than-expected store closures, and intensifying competitionin the dollar store industry amid pressure from Wal-Mart Stores Inc.’s smaller-format boxes, as well as overall weak consumer spending. Standard & Poor's believes the combined entity, with 13,326 stores and $18.4 billion in latest-12-month sales would create a formidable competitor for industry leaderDollar General Corp., which had similar sales and 11,338 stores through its latest quarter.

Dollar Tree is expecting $300 million in annual run-rate synergies to be achieved by the third year post closing but we believe such estimates are subject to execution risk given Family Dollar’s lower EBITDA margin profile, higher mix of lower-margin consumables, and weaker store productivity metrics compared to industry peers. Furthermore, weak spending trends on small ticket items may persist and strain overall industry demand. While Family Dollar and Dollar Tree have similar store sizes and broad geographic reach, we believe Family Dollar’s focus on more urban and rural low to lower-middle income customers could complement Dollar Tree’s mostly suburban demographic and focuson $1 price point offerings.

"We would expect to take a rating action in coming months and assign new ratings to Dollar Tree Inc. after meeting with management and discussing operating strategies and financial policies," said Ms. Iyer. "The recovery prospects of the combined entity would likely drive any ratings of Family Dollar Stores Inc.'s remaining debt."


Moody's Cuts L-T Ratings of Deutsche Bank AG (DB) to 'A2'; Profitability Dragged Down by Litigation, Legacy Costs Jul 29, 2014 07:27AM

Moody's Investors Service has today downgraded the supported long-term debt and deposit ratings of Deutsche Bank AG (NYSE: DB) to A3 from A2, prompted by the bank's modest profitability which is being dragged down by litigation and restructuring costs and legacy losses, as well as elevated earnings volatility and high dependence on capital markets earnings.

At the same time, Moody's also adjusted the bank's standalone bank financial strength rating (BFSR) downward to D+ from C- (equivalent to a standalone baseline credit assessment of baa3 from baa2) and downgraded its subordinated debt rating, its junior subordinated debt rating, and the ratings on most of its capital instruments (its most recent Addtional Tier 1 issue was confirmed). Deutsche Bank's short-term ratings were also downgraded to Prime-2 from Prime-1. The outlook is stable on Deutsche Bank's D+ BFSR and its other unsupported assessments. However, the outlook is negative on Deutsche Bank's supported ratings - reflecting Moody's view of a trend toward a lower likelihood of systemic support for EU banks.

This rating action concludes the review for downgrade initiated on the 6th of May 2014.

A full list of rating actions on Deutsche Bank AG and its subsidiaries is provided below.

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_173556

RATINGS RATIONALE

MODEST PROFITABILITY, ELEVATED EARNINGS VOLATILITY AND HIGH DEPENDENCE ON CAPITAL MARKETS EARNINGS

Since 2012, Deutsche Bank's reported results have been negatively affected by high litigation, regulatory and restructuring costs as well as losses from its legacy portfolio. The bank is also facing adverse cyclical and structural industry trends and regulatory challenges within its capital markets businesses.

To address these issues, management is engaged in a multi-year effort to improve efficiency and rebalance the earnings mix. Moody's believes that Deutsche Bank's ability to execute on its ambitious goals has been challenged and certain targets regarding line of business performance and overall efficiency (the cost-income ratio) have been reset.

"We are expecting modest earnings and a heavy reliance on capital markets revenues at Deutsche Bank for the foreseeable future and this drove the downgrade, despite the recent capital raise," said Peter Nerby, a Moody's Senior Vice-President and lead analyst for Deutsche Bank.

Due to its revenue and expense headwinds, Moody's expects that Deutsche Bank's results will remain depressed at least through 2014 and 2015. These factors are contributing to high earnings volatility and poor operating capital generation at Deutsche Bank. The bank's capital position has strengthened, due to a recent tier one capital raise, but a significant portion of the fresh capital may be required to address the firm's exposure to future litigation and regulatory costs - an expectation that is incorporated in the current ratings. Finally, Deutsche Bank remains more dependent upon its capital markets earnings than many of its peers, and Moody's believes this is a structural weakness that will be difficult for the firm to mitigate.

STABLE OUTLOOK ON THE BFSR

The stable outlook on the D+ bank financial strength rating - equivalent to a baa3 baseline credit assessment (BCA) - incorporates the stabilizing benefits and solid asset quality of Deutsche Bank's retail, commercial and transaction processing businesses. Although overall reported results remain subdued due to the factors described above, execution of the strategic plan would benefit bondholders by strengthening Deutsche Bank's balance sheet and improving its efficiency and potentially rebalancing its earnings mix, supporting its current standalone rating.

NEGATIVE OUTLOOK ON THE SUPPORTED RATINGS

The negative outlook on Deutsche Bank's supported ratings is driven by Moody's view that the probability of systemic support in Europe could diminish over the medium term. This assumption for Deutsche Bank is line with the view taken for other European banks.

Moody's said that Deutsche Bank's A3 supported long-term debt and deposit ratings continue to benefit from the assumption of a very high likelihood of systemic support (which provides three notches of uplift from the standalone BCA).

SHORT-TERM RATINGS

The downgrade of the short-term ratings to Prime-2 from Prime-1 reflects the normal relationship between Moody's long-term and short-term ratings. Moody's said that Deutsche Bank maintains a solid liquidity profile and has reduced its reliance on wholesale funding in conjunction with reducing the size of its balance sheet in the past two and a half years.


Darden Restaurants (DRI) Remains on CreditWatch Negative After Completion of Red Lobster Sale - S&P Jul 28, 2014 11:41AM

Standard & Poor's Ratings Services said its ratings on Darden Restaurant Inc. (NYSE: DRI) including the 'BBB-' corporate credit rating, remain on CreditWatch with developing implications, where we placed them on Dec. 19, 2013.

Darden has announced that the sale of Red Lobster to Golden Gate Capital is complete. The company also extended its cash tender offer of its senior notes to Aug. 7, 2014. As previously announced, Darden will use approximately $1.0 billion of the cash proceeds from the Red Lobster sale to retire outstanding debt.

"We still believe the most likely scenario is to affirm the ratings at 'BBB-' following the completion of the tender offer," said credit analyst Helena Song. "However, we believe the outlook will be negative if we affirm the rating, reflecting our view that operating performance at its key brand, Olive Garden, will remain relatively weak in the next several quarters and that Darden has limited room for further operating underperformance."

We expect to resolve the CreditWatch placement following the completion of the extended tender offer, which we now expect to be in early August, after evaluating the business and financial impact of the finalized transaction, the financing details, and management's financial policies and capital structure, including any resolutions (or taking account of any ongoing disagreements) with the activists.


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