New York, April 06, 2021 -- Moody's Investors Service (Moody's) has assigned a B2 to Uniti
Group Inc.'s (Uniti) proposed $570 million senior
secured notes due 2028 which will be issued by Uniti Group LP, Uniti
Group Finance 2019 Inc. and CSL Capital, LLC. The
B2 rating is the same as the rating on the existing secured debt.
Uniti operates through a customary up-REIT structure under which
it holds its assets through Uniti Group LP, a partnership that Uniti
controls as general partner; Uniti Group Finance 2019 Inc.
and CSL Capital, LLC are subsidiaries of Uniti Group LP.
The net proceeds from the sale of the secured notes will be used to fund
the redemption of the company's 6.6% secured notes due 2023.
All other ratings including Uniti's B3 corporate family rating (CFR) and
stable outlook are unchanged.
Assignments:
..Issuer: Uniti Group LP
....Senior Secured Regular Bond/Debenture,
Assigned B2 (LGD3)
RATINGS RATIONALE
Uniti's B3 corporate family rating reflects the stronger linkage between
Uniti's credit profile and Windstream's following Windstream's recent
bankruptcy exit. Windstream is Uniti's largest tenant and the source
of about 64% of its revenue and a greater percentage of EBITDA.
Under renegotiated master lease agreements with post-bankruptcy
Windstream which are now in effect, Uniti retains the same annual
lease payment it has continued to receive throughout Windstream's bankruptcy
and under the original master lease agreement's payment terms.
Uniti also benefits from strengthened lease terms, including the
addition of guarantees from subsidiaries of Windstream. In return,
Uniti is also now contractually committed to providing up to $1.75
billion of growth capital investment (GCI) reimbursements, subject
to project identification and meeting certain underwriting standards,
to Windstream through 2030, the expiration year of the master lease
agreements. While we expect Uniti to earn a market or near-market
yield on its funding of these leasehold improvements, Windstream's
successful execution of its business improvement plan and market share
growth objectives will also largely determine Uniti's credit trajectory.
Moody's believes the contractual nature of this post-bankruptcy
arrangement more firmly links Uniti's credit profile to that of Windstream's
credit profile than the linkage that existed between the two companies
before Windstream's 2019 bankruptcy. While Windstream will need
to be in compliance with certain financial covenants for Uniti to be obligated
to annually fund the GCI reimbursements to Windstream, Uniti's investments
in fiber and fiber related assets will aid and enable Windstream to better
focus on accelerating fiber investments into residential portions of the
copper-based network under the lease. The degree of linkage
between Uniti's credit profile and Windstream will only meaningfully diverge
when Uniti significantly diversifies its sources of revenue and EBITDA.
Post Windstream's bankruptcy emergence, the innovative bifurcation
of Uniti's pre-bankruptcy master lease agreement with Windstream
into a consumer ILEC network lease and a CLEC network lease could facilitate
the potential future sale of either of these two Windstream businesses
focused on different end markets, which would advance Uniti's lessee
and revenue diversification objectives. The renegotiated leases
are cross-guaranteed and cross-defaulted unless Windstream
ceases to be the tenant. Under terms of a broader settlement with
Windstream, Uniti will also pay approximately $490 million
to Windstream under a cash settlement assuming quarterly installments
over five years. Moody's treats this as an amortizing litigation-related
liability and has added the $490 million to Moody's adjusted debt
calculation; Moody's adjusted EBITDA calculation is not affected.
Uniti's need to meet future GCI reimbursements under renegotiated terms
of its master lease agreements with Windstream, its minimum dividend
required to maintain REIT status and currently high leverage constrain
the company's rating. Moody's expectation for debt/EBITDA (Moody's
adjusted) of approximately 6.4x at year-end 2021 reflects
the likely funding of cash flow deficits with more debt than equity in
2021. Uniti's stable and predictable revenue and its high margins
are supportive of higher leverage tolerance. Moody's estimates
slightly lower debt/EBITDA (Moody's adjusted) in 2022 as the company delivers
steady EBITDA improvement and is expected to employ more balanced external
debt funding for organic growth and capital spending obligations.
Uniti's acquisitions of fiber networks in recent years have aided nominal
revenue diversification, and lease-up opportunities remain
a viable means for increasing cash flow generation without additional
capital spending. The company's June 2020 sale of tower assets
and July 2020 sale of its Midwest fiber network assets boosted liquidity
and highlight a streamlined and selective focus on core leasing and fiber
businesses. However, Uniti's access to capital and cost of
capital are critical inputs to its ability to sustain more significant
future growth beyond its existing asset profile.
Moody's views Uniti's liquidity as adequate. The company had $78
million in cash and $390 million of borrowing availability under
its $500 million revolving credit facility at December 31,
2020. Negative free cash flow is expected in 2021 as a result of
Uniti's dividend payout, steady but high capital intensity and GCI
reimbursements to Windstream. The company is expected to have capital
spending (Moody's adjusted) of $359 million in 2021 and $368
million in 2022, which includes annual GCI reimbursements Uniti
is committed to advancing to Windstream through 2030. Moody's expects
the company will draw on its revolver to help fund its capital spending
with expected later refinancing from a combination of capital raised in
the both the debt and equity markets when appropriate and consistent with
its stated financial policy.
The stable outlook reflects Moody's expectations over the next 12-18
months for marginal increases in recurring revenue, stable EBITDA
margin trends and consistent capital intensity including GCI reimbursements
to Windstream. An expectation for slightly declining debt leverage
(Moody's adjusted) and liquidity to support manageable cash flow deficits
further support the stable outlook.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Given Uniti's revenue and EBITDA concentration with Windstream and dependency
on Windstream's sustained execution of its business improvement plan and
share growth strategy, an upgrade is unlikely in the near term.
Over the medium term, the ratings could be subject to upward pressure
if (i) Windstream's credit profile improves, (ii) Uniti diversifies
its revenue base such that its master lease agreements with Windstream
comprise a substantially lower percentage of its revenue and EBITDA and
(iii) Uniti demonstrates improving leverage and cash flow metrics.
Moody's could lower Uniti's ratings if leverage were sustained above 6.5x
or if there is credit profile weakening at Windstream or if the company's
liquidity deteriorates.
The principal methodology used in this rating was Communications Infrastructure
Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1076924.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Uniti Group Inc. is a publicly traded, real estate investment
trust (REIT) that was spun off from Windstream Holdings, Inc.
in April of 2015. The majority of Uniti's assets are comprised
of a physical distribution network of copper, fiber optic cables,
utility poles and real estate which are under long term, exclusive
master lease to Windstream. Over time, Uniti has acquired
additional fiber assets that it operates as a standalone carrier,
serving enterprise and communications customers.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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Neil Mack, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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JOURNALISTS: 1 212 553 0376
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