New York, August 06, 2020 -- Moody's Investors Service (Moody's) has assigned a B3 corporate family
rating (CFR) and a B3-PD probability of default rating to Windstream
Services, LLC (New) (Windstream) in connection with its post-bankruptcy
exit financing. Moody's has also assigned a Ba3 rating to Windstream's
proposed $500 million super-senior revolving credit facility,
and a B3 rating to proposed first lien debt totaling $2.15
billion, which will be comprised of some combination of a seven-year
first lien term loan and eight-year senior first lien notes.
The outlook is stable.
On June 25, 2020 the US Bankruptcy Court for the Southern District
of New York confirmed Windstream's plan of reorganization.
The company expects to complete its financial restructuring process and
emerge from Chapter 11 bankruptcy protection in late August or September
(Bankruptcy Exit). Upon emergence the company will reduce its funded
debt by more than $4 billion. In anticipation of the Bankruptcy
Exit, Windstream is issuing first lien exit credit facilities (Exit
Credit Facilities) comprised of a $500 million four-year
super senior revolving credit facility (undrawn at Bankruptcy Exit) and
a first lien term loan facility. This first lien term loan facility
will be a portion of an aggregate of $2.15 billion of first
lien debt expected to be issued. The term loan portion of the Exit
Credit Facilities will be drawn down at or prior to Bankruptcy Exit.
The remaining portion of the $2.15 billion of first lien
debt is expected to be issued as senior first lien notes (Escrowed Notes)
that will share the same collateral and be equal in ranking with the first
lien term loan facility. The Escrowed Notes will be issued by two
escrow entities: Windstream Escrow LLC (Windstream Escrow) and a
co-issuer, Windstream Escrow Finance Corp. (Windstream
Escrow Finance), both indirect wholly-owned subsidiaries
of Windstream. At Bankruptcy Exit, Windstream or its successor
will assume the obligations of Windstream Escrow under the Escrowed Notes
and Windstream Escrow Finance will remain the co-issuer.
At Bankruptcy Exit, net proceeds from the issuance of $2.15
billion of first lien debt will be used in combination with $1.035
billion of additional capital -- comprised of proceeds from
a $750 million equity rights offering and a $285 million
asset purchase by Uniti Group Inc. (Uniti) funded with proceeds
from its sale of common stock -- to refinance Windstream's
senior secured super-priority debtor-in-possession
credit facilities, pay for administrative claims and the claims
of general unsecured creditors at non-guarantor subsidiaries,
provide cash to existing creditors and pay exit financing fees.
The Bankruptcy Exit date is uncertain due to remaining regulatory approvals
which are currently expected to conclude no later than September 2020.
Assignments:
..Issuer: Windstream Services, LLC (New)
.... Probability of Default Rating,
Assigned B3-PD
.... Corporate Family Rating, Assigned
B3
....Senior Secured Super Priority Revolving
Credit Facility, Assigned Ba3 (LGD1)
....Senior Secured Term Loan, Assigned
B3 (LGD3)
....Senior Secured Regular Bond/Debenture,
Assigned B3 (LGD3)
Outlook:
..Issuer: Windstream Services, LLC (New)
....Outlook is Stable
RATINGS RATIONALE
Windstream's B3 corporate family rating reflects continuing execution
risks related to the company's plans across its business segments to reverse
declining revenue and EBITDA. This business improvement effort
relies upon significant increases in fiber-based network investments
in the company's Kinetic segment's rural and mainly residential
ILEC footprint. Stabilizing weak operating trends in the company's
Enterprise segment is also critical to the company's strategy but
less certain and more protracted in nature, requiring continued
focus on cost cutting and significant improvement in bookings of software-enabled
strategic product solutions to offset secular declines in legacy services.
Underinvestment impaired Windstream's competitive positioning historically.
The company's leverage tolerance is further limited due to its low asset
coverage following the 2015 sale and leaseback of assets to Uniti which
constrained flexibility. Significantly reduced balance sheet debt
of over $4 billion and improved liquidity at Bankruptcy Exit will
support a comprehensive, multi-year business improvement
effort. While reversing weak operating trends will be difficult
and Windstream's ability to generate sustained free cash flow and
steadily reduce debt leverage is uncertain, the restructured company
will now benefit from improved flexibility to increase capital intensity
and pursue a targeted share growth strategy across competitive end markets.
Under renegotiated master lease agreements with Uniti, Windstream
will realize critical investment assistance from its main lessor through
2030 in the form of steady growth capital investment reimbursements totaling
$1.75 billion. In addition, the original master
lease agreement with Uniti will be bifurcated into structurally similar
but independent agreements governing Windstream's ILEC facilities
and CLEC facilities. With few easily monetizable assets to accelerate
credit improvement, this bifurcation of facilities under the renegotiated
leases could facilitate a future disposition of either end business tied
to those separated network facilities, potentially resulting in
an accelerated and more positive credit profile trajectory. But
currently, Windstream's credit profile improvement is operationally
based and predicated on the company's strengthening and growing
its base of recurring revenue, reducing churn, improving margins,
and better leveraging its scale and branding as a national telecom operator.
Windstream's debt/EBITDA (Moody's adjusted) of approximately
3.6x in 2021 will increase slightly to 3.7x in 2022.
Moody's expects 2021 EBITDA margins (Moody's adjusted) to slightly
improve versus 2020 and further improve in 2022 based on continued aggressive
cost cutting actions, including from network grooming. Stabilization
of negative historical EBITDA trends will be critical to support business
turnaround efforts. Revenue will contract at a high single-digit
pace in 2021 before slowing to a decline pace in the low to mid single-digit
area in 2022. Revenue will continue to contract for several additional
years until Windstream's Enterprise segment revenue stabilizes and
its market share capture strategy in its consumer-focused Kinetic
segment delivers more meaningful growth traction in late 2022 or early
2023 as a result of investments in network upgrades. Moody's
expects Windstream will utilize draws under its revolver in 2021 and 2022
to maintain balance sheet cash of $100 million. Any future
excess free cash flow is expected to be used to pay down outstanding debt.
The Ba3 rating on the super-senior revolver reflects its first-priority
payment relative to the first lien term loan and any senior first lien
notes in a default scenario. The B3 rating on the first lien term
loan and senior first lien notes, at the same level as the CFR,
reflects the preponderance of this class of debt in the capital structure.
Moody's views Windstream's liquidity as good. At Bankruptcy
Exit Moody's expects the company to have $141 million in
cash and cash equivalents and full borrowing capacity availability on
its $500 million super-senior revolving credit facility.
Slightly negative free cash flow generation is expected in 2021 and 2022
due to capital intensity, expected debt financing costs and from
pressures from contracting revenue over the next several years.
The company is expected to have high capital spending (Moody's adjusted)
of approximately $977 million in 2021 and $917 million in
2022, which is net of annual growth capital investment reimbursements
Uniti is committed to advancing under court approved terms of the renegotiated
leases in 2021 and 2022. Uncertainties regarding operational improvements
and the sustainability of market share gains in its competitive markets
could limit the potential for future free cash flow generation,
limiting financial flexibility and impairing the company's ability
to pay down debt.
Post-bankruptcy, five pre-petition debt holders are
expect to have between approximately 77% and 95% economic
and voting control over Windstream's strategic decisions as its
aggressive investment program is implemented to upgrade the bulk of the
company's network to fiber. Funds affiliated with and/or
accounts managed by Elliott Investment Management, L.P.
will be the largest shareholder controlling between approximately 40%
and 50% of Windstream. Execution risks are high and continued
cost cutting is a critical component of the company's strategy,
but good liquidity facilitates a long turnaround runway. Windstream's
post-bankruptcy financial policy is expected to prioritize debt
pay down with excess free cash flow. M&A or asset dispositions
are unlikely in the initial post-bankruptcy years and dividends
are not part of stated financial policy currently.
The stable outlook reflects Moody's expectations over the next 12-18
months for continuing high single-digit revenue contraction but
declining towards a low to mid single-digit percentage of revenue
contraction pace by year-end 2022, stable to slightly improving
EBITDA margins, stable to slightly increasing debt/EBITDA (Moody's
adjusted) and slightly negative free cash flow generation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:
Given the company's current competitive positioning, network upgrade
execution risks, uncertainties regarding continued share growth
traction across its Kinetic segment and weak operating trends in its Enterprise
segment, upward pressure is limited but could develop should Windstream's
free cash flow to debt (Moody's adjusted) track towards mid single-digit
levels as a percentage of Moody's adjusted debt on a sustainable
basis. An upgrade would also require steady market share capture
gains in the company's Kinetic footprint over several years,
consolidated revenue and EBITDA growth and maintenance of a good liquidity
profile.
Downward pressure on the rating could arise should the company's liquidity
deteriorate or should execution of its share capture and growth strategy
materially stall or weaken.
Under its first lien exit credit facilities Windstream will be permitted
to increase its super-senior secured revolving credit facility
or first lien term facility or add one or more additional revolving or
term loan credit facilities through an incremental facility which permits
debt = the greater of $250 million and 25% of EBITDA,
plus additional amounts subject to a net first lien leverage ratio of
2.25x for pari passu debt. Collateral leakage is permitted,
subject to available basket capacity, through the transfer of assets
to unrestricted subsidiaries. There are no additional "blocker"
provisions precluding the transfer of assets. Restricted payments
(RP) from the cumulative credit are subject (under revolving credit facility
documentation, only) to pro forma total net leverage ratio =
2.25x and RPs after a qualified IPO are not to exceed the greater
of 6.00% per annum of the net proceeds received and 7.00%
per annum of market capitalization.
The above are proposed terms and the final terms of the senior facilities
agreement can be materially different.
The principal methodology used in this rating was Telecommunications Service
Providers published in January 2017 and available at https://www.moodys.com/research/Telecommunications-Service-Providers--PBC_1055812.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Windstream Services, LLC is a pure-play wireline operator
headquartered in Little Rock, AR that provides telecommunications
services in 48 states. For the last 12 months ended June 30,
2020, Windstream generated $4.9 billion in revenue.
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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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
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and whose ratings may change as a result of this credit rating action,
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
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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for additional regulatory disclosures for each credit rating.
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
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
