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Announcement:

Moody's says Windstream's acquisition of Broadview is positive, ratings unaffected

13 Apr 2017

New York, April 13, 2017 -- Moody's Investors Service, ("Moody's") said that Windstream Services, LLC's ("Windstream" of "the company") announcement of a definitive agreement to purchase Broadview Networks ("Broadview") is positive but will not immediately impact the company's ratings, including its B1 corporate family rating, or negative outlook. Windstream plans to acquire Broadview for approximately $227 million which includes the repayment of about $160 million of debt outstanding at Broadview. Windstream will fund the transaction using cash on hand and by drawing on its revolving credit facility. The transaction has a modestly favorable impact to leverage (after synergies) and will be accretive to free cash flow. The ratings, including the negative outlook, are not immediately affected due to the deal's small scale and the negative, albeit improved, trajectory of Broadview's revenues. The transaction is expected to close in the third quarter of 2017.

After years of business transformation, Broadview has migrated from a legacy competitive local exchange carrier (CLEC) into a company focused cloud and managed services, specifically unified communications as a service (UCaaS). Double-digit growth in the company's cloud business has helped stabilize Broadview's top line which has been declining due to the decay of its legacy telco services. Further, higher-margin, next-generation services such as UCaaS are becoming a larger part of Broadview's revenue mix resulting in EBITDA growth. Given the low capital intensity of the business, Broadview was able to generate positive free cash flow positive in 2016.

In addition to Broadview's positive growth trajectory, Windstream expects to achieve $30 million in operating expense savings over a two year period following deal close. Windstream may also pursue cross-selling opportunities by offering Broadview's suite of cloud products to its existing SMB and enterprise customers. This strategy is similar to part of the growth plan related to the acquisition of EarthLink Holdings Corp. ("EarthLink"). The acquisitions of EarthLink and Broadview reinforce Windstream's strategic direction that is focused on scalable managed services for enterprise that have large addressable markets. Windstream is likely to continue to target companies in transition whereby they can leverage a target's growth business while extracting synergies and harvesting cash from legacy operations.

Windstream's B1 corporate family rating reflects its scale as a national wireline operator with a stable, predictable base of recurring revenues, offset by high leverage, a declining top line and margin pressure. Moody's believes that Windstream faces a continued erosion of EBITDA and cash flows as a result of prior underinvestment. Moody's expects Windstream's pro-forma EBITDA to decline in the low single digit percentage range for the next several years, although some of this impact could be offset by merger synergies and greater investment into the consumer segment. Moody's views Windstream as having limited leverage tolerance due to its low asset coverage following the 2015 sale and leaseback transaction of its outside plant and real estate assets to Communications Sales and Leasing, Inc. ("CSAL" dba Uniti Group).

Moody's believes Windstream will maintain good liquidity over the next twelve months with $59 million of cash on hand at 12/31/2016 and $775 million available on its $1.25 billion revolver. Windstream has been prudent and proactive in redeeming and refinancing near-term maturities and has no material maturities before 2020. Following the completion of the merger, Windstream's common dividend consumes $116 million of cash annually. Moody's expects this will contribute to near-zero or negative free cash flow over the next several years.

Moody's could downgrade Windstream's ratings if leverage were to be sustained above 5.25x (Moody's adjusted) or free cash flow is negative, on a sustained basis. Additionally, the ratings would face downward pressure if capital investment is reduced below the level sufficient to improve the company's competitive position or cost structure. Moody's could upgrade Windstream's ratings if leverage were to be sustained below 4.5x (Moody's adjusted) and free cash flow to debt were in the mid-single digits percentage range.

Windstream Services, LLC. (formerly known as Windstream Corporation) is a pure-play wireline operator headquartered in Little Rock, AR. The company was formed by a merger of Alltel Corporation's wireline operations and Valor Communications Group in July 2006. Windstream completed its acquisition of EarthLink in February of 2017 and provides services to 48 states.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Mark Stodden
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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