S&P Affirms Ratings on Windstream (WIN); Places on CreditWatch Positive Following REIT Spin Plans

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.

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