Rating Action: Moody's assigns B3 CFR in connection with Windstream's post-bankruptcy exit financing; outlook is stable

Global Credit Research - 06 Aug 2020

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 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.

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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.

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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 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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