S&P Downgrades Windstream (WIN) to 'B+'; Removes from CreditWatch Negative

Standard & Poor's Ratings Services said it lowered its corporate credit rating on Windstream Holdings Inc. (Nasdaq: WIN) to 'B+' from 'BB-'. The outlook is stable.

At the same time, we lowered our issue-level ratings on Windstream's senior secured debt to 'BB' from 'BB+'. The recovery rating on this debt remains '1', which indicates our expectation for very high (90%-100%) recovery in the event of payment default.

We also lowered the issue-level rating on the company's senior unsecured debt to 'B+' from 'BB-'. The recovery rating remains '4', which indicates our expectation for average (30%-50%; upper half of the range) recovery in the event of payment default.

We removed all ratings from CreditWatch, where we had placed them with negative implications on Aug. 6, 2015.

"Notwithstanding the company's recent announcement that it entered into an agreement to sell its data center assets for $575 million and use about $300 million of the proceeds to repay debt, the ratings downgrade reflects our view that Windstream faces a challenge to grow revenue and EBITDA longer term because of weak operating performance and competitive pressures in certain business segments," said Standard & Poor's credit analyst Allyn Arden.

The rating downgrade also reflects Windstream's aggressive financial policy as implied by its $75 million stock buyback program and ongoing dividend, which limits the potential for leverage improvement. We expect that the company will continue to pursue a strategy that allocates a portion of excess cash flow to drive shareholder returns. As such, we believe that Windstream's adjusted debt to EBITDA will remain in the mid-5x area, or higher, and that free operating cash flow (FOCF) to debt will be less than 5% over the next couple of years and could weaken longer term. We are therefore revising our financial risk assessment to "highly leveraged" from "aggressive".

The rating outlook is stable and reflects our expectation that some debt repayment will at least partially offset declining revenue and lower levels of EBITDA such that adjusted debt to EBITDA remains in the mid- to high-5x area over the next year.

We could lower the rating on Windstream if higher rates for broadband services do not fully offset declines in customers or competitive pressures in the SMB segment intensify due to cable competition. These factors could result in steeper revenue declines and margin erosion, which could prompt a revision in our business risk assessment and result in leverage rising above 6x along with negative discretionary cash flow.

Rating upside is unlikely over the next year given the sizeable debt-like obligation associated with the fixed-lease payment to the REIT. Windstream would need to grow revenue and EBITDA on a sustained basis such that leverage declined to the 5x area and FOCF to debt improved to over 5% on a sustained basis.

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