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
