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Rating Action:

Moody's upgrades Uniti's CFR to B3; outlook changed to stable

06 Oct 2020

New York, October 06, 2020 -- Moody's Investors Service, (Moody's) has upgraded Uniti Group Inc.'s (Uniti) corporate family rating (CFR) to B3 from Caa2, probability of default rating (PDR) to B3-PD from Caa2-PD, senior secured debt rating to B2 from Caa1 and unsecured debt rating to Caa2 from Ca. The rating outlook was changed to stable from rating under review. These actions conclude the review for upgrade initiated on July 22, 2020. Uniti's speculative grade liquidity (SGL) rating remains unchanged at SGL-3, indicating adequate liquidity.

The upgrade of the CFR and stable outlook reflect the improved financial flexibility of Uniti's primary customer, Windstream Services, LLC (Windstream, B3 stable), following Windstream's September 2020 exit from bankruptcy and balance sheet restructuring.

Uniti's financial policy, which incorporates a publicly stated objective to lower gross debt leverage (company defined) to 6x or lower and an expectation for employing more balanced equity and debt funding of cash flow deficits and M&A growth, will be an important driver of its credit profile going forward.

Upgrades:

..Issuer: Uniti Group Inc.

.... Corporate Family Rating, Upgraded to B3 from Caa2

.... Probability of Default Rating, Upgraded to B3-PD from Caa2-PD

....Senior Secured Bank Credit Facility, Upgraded to B2 (LGD3) from Caa1 (LGD3)

....Senior Secured Regular Bond/Debenture, Upgraded to B2 (LGD3) from Caa1 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Upgraded to Caa2 (LGD5) from Ca (LGD5)

Outlook Actions:

..Issuer: Uniti Group Inc.

....Outlook, Changed To Stable From Rating Under Review

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. Windstream's post-bankruptcy reduction of more than $4 billion of funded debt improves its financial flexibility and improves the certainty of future cash flows to Uniti. 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 which eliminate the risk of an adverse recharacterization of the renegotiated master leases in a potential future Windstream bankruptcy. 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 6.6x at year-end 2021 reflects the likely funding of cash flow deficits with more debt than equity during the next 9 to 12 months. 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 $88 million in cash and $290 million of borrowing availability on its $418.3 million revolving credit facility at June 30, 2020. With proceeds from the sale of its Midwest fiber network assets immediately following the second quarter of 2020, Uniti had approximately $550 million of pro forma combined cash and cash equivalents, including fully undrawn revolving credit facility capacity. Negative free cash flow is expected in 2020 and 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 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 stable to 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 RATINGS

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 downgrade 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 these ratings 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 debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings 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 case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social 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. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com 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

No Related Data.
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