Fitch: Windstream's Proposed Formation of REIT a Potential Long-term Positive

Fitch Ratings believes that Windstream Holdings, Inc.'s (NASDAQ: WIN) proposed separation of certain assets into a real estate investment trust (REIT) and the continuation of its communications business under Windstream Holdings will have no immediate effect on debt issued by Windstream Corporation (Windstream) and its subsidiaries. Windstream is a wholly-owned subsidiary of Windstream Holdings and has a Fitch Issuer Default Rating (IDR) of 'BB', with a Stable Rating Outlook.

To effect the transaction, Windstream will place its fiber and copper transmission facilities (aerial and underground), central office buildings, conduits, poles and other qualifying assets into the REIT. Windstream will then enter into a long-term master lease agreement with the REIT to lease the facilities back under a triple-net lease structure, with an initial payment of $650 million annually. Windstream will maintain operational control of the assets under the lease.

In the long term, Fitch believes the transaction improves Windstream's credit profile, based on prospects for improved free cash flow (FCF) and the potential for higher capital investment. In addition, immediately after the transaction, Fitch estimates Windstream's debt leverage will fall from approximately 3.8x to 3.3x, although this benefit will be partly offset by the rise in lease adjusted leverage resulting from the master lease payment.

Following the close of the transaction, Windstream Holdings' dividend policy will call for a $0.10 per share annual dividend, and the REIT will pay an anticipated distribution of $0.60 (based on a one-for-one share distribution), for a total of $0.70. This compares to the current annual dividend of $1.00 per share. In Fitch's view, the lower dividend will improve FCF and provide Windstream with greater financial flexibility to invest more in its business. The lease will offer cash flow benefits to Windstream as it is fully tax deductible.

The debt reduction will be accomplished by an exchange, as well as debt repayment through the use of proceeds from a tax-basis distribution to be received by Windstream Holdings. Windstream's management anticipates that the REIT will be leveraged at approximately 5.4x. With the split, the remaining telecom business will focus on growth, while the REIT will continue as a higher yielding entity.

The company has received a private letter ruling from the IRS. In addition, the transaction will require regulatory approvals, including from certain state public utility commissions.

RATING SENSITIVITIES

A positive rating action could occur if:

--Revenues and EBITDA stabilize or demonstrate a return to growth on a sustained basis;

--Debt leverage becomes sustainable in a range moderately lower than Fitch's previous sensitivity (of 3.2x-3.5x on a gross basis) owing to the effect of the master lease payment on adjusted debt-to-EBITDAR. Due to the material nature of the master lease payment, Fitch will use its total adjusted debt-to-operating EBITDAR leverage metric when examining Windstream's capital structure and leverage profile.

A negative rating action could occur if:

--Competitive and business conditions are such that the company no longer makes progress toward revenue and EBITDA stability;

--Debt leverage is expected to approach 4.0x or higher for a sustained period.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Rating Telecom Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323

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