Fitch Ratings has placed the 'B' Long-Term Issuer Default Rating (IDR) of Windstream Holdings II, LLC and Windstream Services, LLC on Rating Watch Evolving (RWE).
Fitch has also placed Windstream's 'BB'/'RR1' super senior and first lien senior secured ratings on RWE.
The rating action follows Uniti Group's recent announcement that it plans to acquire Windstream Holdings II, LLC (WIN) and reflects Fitch's expectation that the combined company will likely be rated 'B+' or lower. On a standalone basis, Windstream's ratings reflect Fitch's expectation of continued revenue pressures due to secular declines in WIN's legacy products, offset by stabilizing EBITDA due to continued cost take-outs and fiber investments resulting in Kinetic consumer market share gains. Fitch expects adjusted leverage (total adjusted debt/EBITDAR) to remain around 5x on a standalone basis and EBITDA leverage (total debt/ EBITDA) below 5.5x on a combined company basis post transaction close.
Fitch expects to resolve the Rating Watch once the transaction is complete under the announced terms, which is expected to take longer than six months and close in 2H2025.
Key Rating Drivers
Uniti Acquisition: On May 3, 2024, Uniti announced that it has entered into a definitive agreement to merge with Windstream. The merger is expected to close in the 2H2025, subject to the satisfaction of customary closing conditions and approvals.
Post-merger, Uniti shareholders will hold approximately 62% of the outstanding common equity of the combined company. Windstream shareholders will receive $425 million of cash, $575 million of preferred equity in the new combined company, and common shares representing approximately 38%. Windstream shareholders will additionally receive non-voting warrants to acquire up to 6.9% of common shares of the combined company. Uniti expects to fund the $425 million of cash consideration to shareholders of Windstream from operations, revolver borrowings and/or future capital markets transactions.
The merger will position the combined company focused on Tier II and Tier III markets and result in significant synergies and elimination of inefficiencies. The company has guided to up to $100 million in opex and $20-30 million in capex synergies.
Elevated Leverage: The PF net leverage of the combined company as of YE2023 is approximately 5.1x (4.8x including synergies). Fitch expects the EBITDA leverage to increase to near mid 5x in 2025 due to revenue and EBITDA pressures from Windstream's legacy revenue as well as continued high capex as the combined company will accelerate FTTH deployments to an additional one million households.
On a standalone basis, Fitch evaluates the company's leverage on a lease-adjusted basis since a significant portion of WIN's assets are leased from Uniti (applying an 8x multiple to the master and other lease payments, adjusted for settlement payments). Fitch projects adjusted leverage will remain in near 5x range over the forecast.
Revenue Pressures Continue: Fitch expects the combined revenue and EBITDA of approx. $4.1 billion and$1.5 billion at FYE2024. On a standalone basis, Windstream continues to experience pressure particularly in Enterprise segment due to declining legacy-products-related revenue and effects of competition. However, the strategic Enterprise revenue, continues to grow in double digits and offset some of these underlying pressures. Fitch's base case assumes Enterprise revenue declines near mid-single-digits in 2024 with declines moderating through the forecast horizon, especially once the company exits TDM in 2025. Consumer revenue has continued to grow in low digits, aided by sustained broadband customer growth over the last few years.
High Standalone Strategic Execution Risk: Fitch believes there is a meaningful execution risk to the company's strategy to contain revenue declines and grow EBITDA over the next few years. While there are relatively low risk opportunities such as interconnection costs take-out that will support EBITDA, WIN's ability to gain residential market share through increased network investments will be a key driver for future revenue growth. In Fitch's view, Windstream has limited capacity to mitigate execution risks while still deleveraging.
GCI Led Increased Spending: As part of the settlement agreement with Uniti, the latter will reimburse WIN a total of $1.75 billion in growth capital investments (GCI) through 2030, and pay Windstream about $400 million over five years, at an annual interest rate of 9%.
GCI reimbursements will be critical to support WIN's fiber to the home (FTTH) investment strategy that aims to drive 1GB speed to approximately half of its ILEC footprint, roughly two million homes by 2026. The combined company will accelerate FTTH deployments to additional one million households.
Cost Savings Support Standalone Margins: Windstream continues to optimize costs including realization of cost savings from interconnection expenses (i/c expenses) as it transitions away from legacy products. WIN launched a three-year TDM exit plan in 2020 to migrate almost all its CLEC customers off of the TDM network to newer technologies. Fitch believes i/c cost savings along with additional identified cost saving opportunities will continue to support EBITDA margins over the rating horizon.
Parent Subsidiary Linkage: Under the announced transaction terms, Fitch will likely equalize the ratings of Uniti and Windstream subsidiaries with the newly created combined parent company. We expect legal incentive to be low due to separation of credit silos and no expected cross guarantees between the two silos, or from the parent entity. Strategic incentive is high due to the subsidiaries' substantial financial contribution from both Windstream and Uniti to the parent, as well the critical advantage of combining an Opco and Propco. Operational incentive is high due to common ownership and elimination of inefficiencies once the merger is complete
Derivation Summary
Windstream is a hybrid in that it has characteristics of both an incumbent operator with its Kinetic business unit (ILEC business) operating in primarily rural areas in 18 states and as a business services provider with its Enterprise and Wholesale units (CLEC), which compete nationally.
In comparison to Frontier Communications Parent, Inc. (B+/Negative), standalone Windstream has less exposure to the residential market. The residential market held up relatively well during the coronavirus pandemic but continues to face secular challenges. WIN derives approximately 25% of revenues from consumers whereas Frontier generates about 50% of consumer revenues. Frontier has a slightly larger scale than Windstream and operates at similar leverage compared with WIN's lease adjusted leverage. Both Frontier and WIN have similar EBITDA(/R) margins on a like-to-like basis.
In the enterprise service market, Windstream has a weaker competitive position based on scale and size of its operations in the enterprise market. Larger companies, including AT&T Inc. (BBB+/Stable), Verizon Communications Inc. (A-/Stable), and Lumen Technologies, Inc. (CCC+), have an advantage with national or multinational companies given their extensive footprints in the U.S. and abroad. Besides scale, these companies operate at a lower leverage and have better financial flexibility and FCF profile.
Key Assumptions
Combine Co
Fitch has assumed $4.1 Billion of PF 2024 revenue and $3.9 billion of PF 2025 revenue for the combined Uniti and Windstream.
PF 2024 EBITDA in the range of $1.5B-$1.6B in 2024 and 2025.
Combined PF capex including synergies of roughly $1B in 2024 declining to capex in the range of $800 million-$900 million in 2025 and 2026.
EBITDA Leverage in low to mid 5x in 2025 and 2026.
Windstream Standalone
Fitch expects revenue declines averaging near mid-single-digit in 2024. 2023 revenue declined due to revenue pressures in Kinetic and Enterprise segments, partially offset by increasing Wholesale segment. Starting in 2026, Fitch expects revenue growth in low single digits, driven by Kinetic and Wholesale revenue growth and TDM exit in Enterprise that's largely expected in 2025.
2024 EBITDA margins are in low to mid 20%.
No dividends are assumed over the forecast.
Fitch expects adjusted leverage (total adjusted debt/EBITDAR) to remain in near 5x range.
Recovery Analysis
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Windstream would be reorganized as a going-concern in bankruptcy rather than liquidated. The recovery analysis reflects WIN's standalone credit silo waterfall.
We have assumed a 10% administrative claim.
The revolving facility is assumed to be fully drawn.
WIN's GC EBITDA is based on 2023 LTM EBITDA. The GC EBITDA is assumed roughly 24% lower than the LTM EBITDA in a bankruptcy scenario due to company's inability to grow consumer and/or strategic business revenue that is sufficient to offset declines in legacy revenue. These pressures could stem from competitive pressures, an unsuccessful fiber deployment strategy or protracted pressures on enterprise revenue. EBITDA declines faster than anticipated, eroding benefits from cost cutting measures.
The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the enterprise valuation.
An EV multiple of 4.5x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value. The choice of this multiple considered the following factors:
The historical bankruptcy case study exit multiples for most telecom companies ranged from 3x-7x, with a median of 5.4x.
Windstream emerged from bankruptcy in 2020 with a reorganization multiple of roughly 3.5x. Frontier Communications emerged in early 2021 at near 5x. FairPoint's reorganization multiple was 4.6x following its emergence from bankruptcy in 2011.
We use a 4.5x multiple to reflect WIN's improved capital structure (reduced debt levels) following the restructuring and the strategic focus on fiber spending to increase market share.
The recovery analysis produces Recovery Ratings of 'RR1' for the all secured debt, reflecting strong recovery prospects (100%).
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The RWE could be resolved and Windstream's IDR affirmed at 'B' if the merger doesn't close and Windstream is within its standalone rating sensitivities. This rating action could also result in the event Uniti merger closes and Uniti's IDR is downgraded to 'B' at close, based on the combined parent company's 'B' rating.
The RWE could be resolved and Windstream's IDR could be upgraded to 'B+' if Uniti merger closes and Uniti's IDR is affirmed at 'B+' on transaction close, based on the combined parent company's 'B+' rating.
On a standalone basis:
Revenue stabilization achieved through a) continued growth in broadband subscribers as a result of increased GCI spending and b) expansion in strategic enterprise revenue.
Successful execution on cost reduction plans, resulting in EBITDA margins sustained in low-to-mid 20s range and consistently positive FCFs.
Adjusted leverage, defined as total adjusted debt/ operating EBITDAR, sustained below 4.0x or a positive adjusted (CFO-capex)/ Total debt where capex is adjusted for GCI reimbursements.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The RWE could be resolved and Windstream's IDR could be downgraded to 'B-' if the Uniti merger does not close and Windstream is outside its standalone negative sensitivities.
On a standalone basis:
Deterioration in operating profile, including inability to stabilize revenue or offset EBITDA pressure through cost reductions.
Aggressive shareholder policies such as dividend recaps resulting in negative FCFs (adjusted for Uniti GCI reimbursements) on a sustained basis.
Adjusted leverage sustained above 5.0x; or adjusted (CFO-capex)/total debt below -7%.
Liquidity and Debt Structure
Fitch believes Windstream has sufficient liquidity supported by cash balances and availability under the $500 million revolver. As of March 31, 2024, there was approximately $360 million available under the revolving facility (including $140 million of LCs into consideration). There are no significant maturities in the near term.
Windstream's capital structure consists of: (a) a $500 million super senior secured revolving facility (with $475 million extending to 2027), (b) $250 million super senior incremental term loan maturing February 2027, (c) a $750 million term loan facility maturing September 2027, and (c) $1,400 million of senior secured notes due August 2028. The first lien term loan amortizes at the rate of 1% annually.
The first lien obligations under both the credit agreement and the indenture are secured by substantially all assets of the company and its guarantor subsidiaries. The credit facility is also guaranteed by Windstream Holdings II, LLC. The revolver includes a financial maintenance covenant of 3.5x total net leverage ratio, which declines to 3.25x effective June 30, 2024.
Windstream's settlement agreement with Uniti has a 3.0x total leverage incurrence covenant with respect to Uniti's GCI commitment obligations. The settlement agreement also provides that Uniti will not be required to comply with its GCI funding commitment if Windstream's total leverage ratio exceeds 3.5x (the maintenance leverage covenant) and Windstream breaches certain conditions on debt incurrence, dividends and acquisitions amongst other provisions as provided in the agreement. The maintenance and incurrence covenant do not apply at certain rating levels, as defined in the agreement.
Issuer Profile
Windstream offers bundled broadband, voice, digital television and security solutions to consumers primarily in rural areas in 18 states. On May 3, 2024, Uniti announced a re-merger with Windstream.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
WINDSTREAM HOLDINGS II, LLC 
