Fitch Ratings has affirmed Windstream Corporation's (Windstream) ratings as follows:
--Long-term Issuer Default Rating (IDR) 'BB+';
--Secured credit facility 'BBB-';
--Senior unsecured notes 'BB+'.
Subsidiary ratings, as listed at the end of the release, have been affirmed. The Rating Outlook is Stable.
The affirmation of Windstream's ratings and the Stable Outlook incorporate expectations for the company to generate strong operating cash flows, to maintain stable credit-protection metrics and to have access to ample liquidity. Fitch expects the company to maintain debt-to-EBITDA in the 3.2 times (x) to 3.4x range over the next few years, even while it completes a $400 million stock repurchase program by the end of 2009. At the end of 2007, gross debt-to-operating EBITDA was 3.17x. Fitch forecasts that Windstream's dividend payout ratio as a percentage of its net free cash flow will be in the 70%-75% range, although it could be somewhat below the range in 2008 as a result of the effect of stock repurchases on aggregate dividends. Fitch expects the stock repurchases to be funded primarily from free cash flows.
The $400 million stock repurchase program was announced on Feb. 8, 2008. Based on the stock price at the time, completion of the plan will result in a reduction in the company's shares outstanding of approximately 8%, and would lower the company's dividend payout ratio by 300-400 basis points. As defined by covenants in its indentures, Windstream had approximately $255 million of restricted payment capacity when the board approved the plan, and by the middle of the year expects to have more than $400 million in capacity.
Fitch believes that Windstream's rural footprint provides it with modestly lower exposure to competition than the urban-based regional Bell operating companies (RBOCs). Thus far, competition has emanated from wireless and cable telephony substitution for voice services, as well as cable modem competition for its high-speed data services. At the end of 2007, cable telephony reached approximately 50% of Windstream's access lines. To mitigate competitive pressures, Windstream is growing revenue from new services, including the continued deployment of high-speed data services, and by including in its bundle satellite-provided video services through an agreement with DISH Network. In 2008, the competitive pressures on operating cash flows are expected to be mitigated by the synergies from the CT Communications acquisition, which has been recently fully integrated into Windstream's operations.
Windstream's access line losses were 4.6% in 2007, pro forma for the acquisition of CT Communications and the 2006 merger with Valor Telecommunications, due to the expansion of availability of cable telephony and wireless substitution. Fitch expects losses to be slightly higher in 2008, with some added pressure from a weakening economy and the downturn in the housing market.
Windstream is expected to face modest pressure on its Universal Service Fund (USF) receipts in 2008 due to Windstream's reduced costs relative to national average costs per loop. In the longer term, Windstream could be affected by reforms to the USF program. Intercarrier compensation is another area of potential reform that could affect the company. However, with the elections later in 2008, Fitch believes Federal policy changes are unlikely until sometime thereafter.
Fitch believes that Windstream is likely to continue to evaluate potential acquisitions, which would be a use of cash flow. Fitch notes that the company's agreements with its former parent, Alltel Corp., contain certain constraints on the amount of stock that could be issued for acquisitions which arise from the need to maintain the tax-free status of the spin-off. Such restrictions are in effect until mid-2008.
At Dec. 31, 2007, Windstream had approximately $5.4 billion in outstanding debt and $72 million in cash and short-term investments. Windstream's credit facilities currently consist of a $500 million five-year revolving credit facility ($100 million outstanding at year-end 2007) and $1.676 billion in term credit facilities. The term credit facilities are composed of a term loan A facility of $283 million outstanding that matures in July 2011, and a term loan B facility of $1.393 billion outstanding that matures in July 2013. The term loan A was reduced by $210 million as a result of the split-off of the directory business in November 2007. Windstream does not face any significant maturities until the term loan A matures in 2011, and the revolving credit facility expires. During 2008 through 2010, there are approximately $24 million in maturities annually.
The credit facilities are secured by assets in a portion of Windstream's regulated wireline business, as well as by the assets of its unregulated businesses. Regulated subsidiaries that required the approval of the transaction, or approval of a grant of a guarantee, by state regulators did not provide a guarantee to the senior secured credit facilities. As of Dec. 31, 2007, guarantor subsidiaries held 45%, or approximately $3.7 billion, of Windstream's total assets. Principal financial covenants in the credit facilities require a minimum interest coverage ratio of 2.75x and a maximum leverage ratio of 4.5x. There are limitations on capital spending, and the dividend is limited to the sum of excess free cash flow and net cash equity issuance proceeds subject to pro forma leverage of 4.5x or less.
Fitch has also affirmed the following ratings:
Valor Telecommunications Enterprises, LLC and Valor Telecommunications Enterprises Finance
Corp. (co-issuers):
--IDR 'BB+';
--Senior notes 'BBB-'.
Windstream Georgia Communications
--IDR 'BB+';
--Notes 'BBB-'.
Windstream Holdings of the Midwest
--IDR 'BB+';
--Notes 'BB+'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
John Culver, CFA, +1-312-368-3216
Bill
Densmore, +1-312-368-3125
Media Relations, New York
Brian
Bertsch, +1-212-908-0549
