Fitch Affirms Windstream's IDR at 'BB+'; Revises Outlook to Negative
Fitch Ratings has affirmed the 'BB+' Issuer Default Rating (IDR) of Windstream Corporation (Windstream) (NASDAQ: WIN) and its subsidiaries. The Rating Outlook has been revised to Negative from Stable. A complete list of affected issuers is at the end of the release.
KEY RATING DRIVERS
Key rating factors which support the rating include:
--Expectations for the company to generate improved free cash flow (FCF)
in 2013 as certain capital spending projects wind down;
--Revenues have become more diversified as recent acquisitions have brought additional business and data services revenue. Business service and consumer broadband revenues, which both have stable or solid growth prospects, were 70% of revenues in the fourth quarter of 2012.
The following concerns are embedded in the revised Negative Outlook:
--Windstream's high leverage, which is expected to moderate at a slower
pace than previously expected;
--Moderate pressure on EBITDA, which is hindering improvements in leverage. Pressure is arising primarily from declines in high-margin intercarrier compensation revenues and higher spending on enterprise sales initiatives in 2013;
--Competition for consumer voice services.
Windstream's gross leverage in 2012, excluding noncash actuarial losses on its pension plans and other nonrecurring charges (merger and integration charges), was 3.77x (3.70x on a net leverage basis), somewhat above the upper end of the company's net leverage target of 3.2x-3.4x. Fitch also believes leverage is high for the current rating category.
For 2013, Fitch estimates Windstream's gross leverage will be in the 3.6x to 3.7x range. While Fitch expects debt to decline as FCF is applied to reducing debt, an expected moderate decline in EBITDA leads to only a slight improvement in leverage. Pressure on EBITDA is expected to be only partially offset by known cost reductions. Approximately $15 million in cost savings from the PAETEC acquisition remain to be achieved in 2013, and there will be incremental effects of a management reorganization completed in the third quarter of 2012 that has resulted in approximately $40 million in annual cost savings.
On Dec. 31, 2012, Windstream's $1.25 billion revolver due December 2015 was undrawn, and $1.234 billion was available (net of letters of credit) and the company had $158 million of cash on its balance sheet (including $26 million of restricted cash primarily related to broadband stimulus projects). 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 free cash flow and net cash equity issuance proceeds subject to pro forma leverage of 4.5x or less.
As of Dec. 31, 2012, debt maturities over 2013 and 2014, excluding bank debt amortization, are $810 million in 2013, and none in 2014. Fitch believes the company may use cash on hand, combined with revolver borrowings, to repay the $800 million of senior unsecured notes maturing in August 2013, with revolver borrowings subsequently paid down as FCF is generated. Fitch estimates FCF (after dividends) for Windstream will be in the $275 million to $325 million range in 2013. The company's guidance calls for 2013 capital spending in the $800 million to $850 million range, down from approximately $1.1 billion in 2012 (including PAETEC integration capital spending). Capital spending declines in 2013 as spending on fiber to the tower projects declines and as PAETEC integration capital spending is nominal. Cash taxes are expected to remain low in 2013 (in the range of $37 million to $42 million), but rise in 2014.
The Rating Outlook could be revised to Stable if:
--Leverage is on a path to decline to 3.5x or below by the end of 2014; and
--Revenues and EBITDA stabilize or demonstrate a return to growth on a sustained basis over a 12-to-18 month horizon.
A negative rating action could occur if:
--Leverage is expected to remain above 3.5x;
--Revenues and EBITDA continue to decline over a 12-to-18 month horizon, thus inhibiting the pace of potential delevering.
Fitch has affirmed the following ratings and revised the Rating Outlook to Negative from Stable:
--Long-term Issuer Default Rating (IDR) at 'BB+';
--$1.25 billion senior secured revolving credit facility due 2015 at 'BBB-';
--$409 million senior secured credit facility, Tranche A3 due 2016 at 'BBB-';
--$292 million senior secured credit facility, Tranche A4 due 2017 at 'BBB-';
--$597 million senior secured credit facility, Tranche B3 due 2019 at 'BBB-';
--$1.345 billion senior secured credit facility, Tranche B4 due 2020 at 'BBB-'; and
--Senior unsecured notes at 'BB+'.
Windstream Georgia Communications
--IDR at 'BB+';
--$10 million senior unsecured notes due 2013 at 'BBB-'.
Windstream Holdings of the Midwest
--IDR at 'BB+';
--$100 million secured notes due 2028 at 'BB+'.
PAETEC Holding Corp. (PAETEC)
--$62 million senior secured notes due 2017 'BB+';
--$450 million senior unsecured notes due 2018 'BB+'.
As a result of repayment in January 2013, the following ratings have been withdrawn:
--$20 million (total) senior secured credit facility, Tranche A2 due 2013 'BBB-';
--$281 million senior secured credit facility, Tranche B due 2013 'BBB-'; and
--$1.043 billion senior secured credit facility, Tranche B2 due 2015 'BBB-'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Telecom Companies
John C. Culver, CFA, +1-312-368-3216
Fitch Ratings, Inc.
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Bill Densmore, +1-312-368-3125
Michael Weaver, +1-312-368-3156
Brian Bertsch, New York, +1 212-908-0549