Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Uniti Group Inc. and the IDRs of Uniti Group L.P. and Uniti Fiber Holdings at 'B+'.
In addition, the senior secured debt of Uniti Group L.P. has been affirmed at 'BB+'/'RR1' and the senior unsecured debt of Uniti Group L.P. and Uniti Fiber Holdings has been affirmed at 'B'/'RR5'. The Rating Outlook is Stable.
Uniti Group Inc.'s rating reflects its stable revenue and EBITDA due to the contractual nature of its revenue stream, including the long-term lease payments from Windstream Services. This is balanced against the company's high tenant concentration, with approximately two-thirds of its revenues derived from Windstream.
Key Rating Drivers
Cash Flow and Revenue Stability: In addition to the stable long-term lease payments from Windstream, Uniti's ratings incorporate expectations for growth in its non-Windstream leasing business as well as in its fiber segment. Uniti's revenue growth prospects benefit from the secular tailwinds for data consumption and broadband connectivity, both wireline and wireless. The master leases with Windstream produced approximately $667 million in cash revenue in 2021, and will grow slightly due to escalators over time. Returns on Uniti's funding of growth capital improvements (GCIs) are incremental to this amount.
Uniti is expected to derive approximately 34% of revenue outside of the Windstream leases in 2022 via leases to other telecommunications entities and through contracts providing ?ber capacity to wireless carriers, enterprise and wholesale carriers and government entities.
Leverage Improvement: Uniti's net leverage (net debt/recurring operating EBITDA) declined in 2021 to 5.9x from 6.1x in 2020 due to operating improvements. In 2020, asset sales contributed to a decline to 6.1x from 6.4x in 2019. Acquisitions prior to 2019 had caused net leverage to be elevated. Fitch expects Uniti to ?nance future transactions such that net leverage will remain relatively stable at mid-5x to 6x over the long term.
Fitch does not include the Windstream settlement obligation as debt; as of June 30, 2022, the remaining obligation was approximately $245 million. The company directed a portion - $78 million - of debt raised in 2021 to partially prepay the settlement obligation, but even if the company financed the remaining obligation with debt it would not have an impact on the rating as the company would still be within Fitch's rating sensitivities.
Liquidity is Solid: Liquidity at June 30, 2022 was approximately $361 million, consisting of cash of approximately $61 million and revolver availability of approximately $300 million. Windstream's 2020 emergence from bankruptcy materially reduced Uniti's risk and improves prospects for the company. Uniti's funding needs have increased to fund Windstream's GCIs per the terms of their settlement agreement.
Tenant Concentration: Windstream's master leases provide approximately 66% of Uniti's revenue. At the time of the spinoff, nearly all revenue was from Windstream. Fitch believes improved diversi?cation is a positive for the company's credit pro?le, as major customer verticals outside of Windstream consist of large wireless carriers, national cable operators, government agencies and education.
Leased Assets' Importance to Windstream: Fitch believes Uniti's assets are essential to Windstream's operations, and this has been validated by the approval of the settlement agreement. In certain markets, Windstream is a 'carrier of last resort' from a regulatory perspective, and would require permission from state public utility commissions and the Federal Communications Commission to cease providing service in those markets.
Geographic Diversi?cation: The company's geographic diversi?cation is solid, given Windstream's geographically diverse operations and the expanded footprint due to acquisitions since the spinoff.
Derivation Summary
As the only ?ber-based telecommunications REIT, Uniti (B+/Stable) currently has no direct peers. Uniti is a telecom REIT formed through the spinoff of a signi?cant portion of Windstream's ?ber optic and copper assets. Windstream retained the electronics necessary to continue as a telecommunication services provider. Fitch believes Uniti's operations are geographically diverse, as they are spread across more than 30 states, while the assets under the master lease with Windstream provide adequate scale.
Other close comparable telecommunications REITs are tower companies, including American Tower Corporation (BBB+/RWN), Crown Castle International Corp. (BBB+/Stable) and SBA Communications Corporation (not rated). These companies lease space on towers and ground space to wireless carriers, and are a key part of the wireless industry infrastructure.
However, the primary difference is tower companies operate on a shared infrastructure basis with multiple tenants, whereas a substantial portion of Uniti's revenues are derived on an exclusive basis under sale-leaseback transactions. Uniti's leverage is higher than that of American Tower or Crown Castle, but lower than that of SBA.
Uniti's network is one of the largest independent fiber providers in the U.S., along with Zayo Group Holdings, Inc. The business models of Uniti and Zayo are unlike the wireline business of communications services providers, including AT&T Inc. (BBB+/Stable), Verizon Communications Inc. (A-/Stable) or Lumen Technologies (BB/ Stable). Uniti and Zayo are providers of infrastructure, which may be used by communications service providers to provide retail services, including wireless, voice, data and internet.
Crown Castle is an increasingly large participant in the ?ber infrastructure business through a series of acquisitions. The large communications services providers self-provision, and they may use a ?ber infrastructure provider to augment their networks.
Uniti's ?ber acquisitions since the spinoff are a key credit consideration, as they reduced the concentration of revenues and EBITDA from the Windstream master leases. Customers in the ?ber business include wireless carriers, enterprises and governments.
Fitch believes aspects of Uniti's credit pro?le are similar to cases in the gaming industry where there are single-tenant or concentrated leases between operating companies and their respective REITs (propcos). Both Uniti and gaming REITs bene?t from triple net leases. Fitch believes the propcos are better positioned, as rents may continue uninterrupted through the tenant's bankruptcy because such rents are an operating expense and unlikely to be rejected as a result of the master lease structure.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer Include:
In 2022-2025, Fitch expects revenues to increase in the low single digits.
Fitch expects EBITDA margins to be slightly under 80%;
Fitch has reflected the terms of the settlement agreement with Windstream, including the payment of the settlement obligations and the funding of certain Windstream growth capital improvements;
Fitch expects Uniti to target long-term net leverage in the mid-5x range to 6x range; Fitch expects gross leverage to be in the high-5x range to 6x longer term;
Fitch estimates 2022 net success-based capital spending will be in the $400 million range, in line with company public net success-based capex guidance for fiber and leasing;
Fitch has assumed dividends grow in the low single digits going forward.
Recovery
The recovery analysis assumes that Uniti would be considered a going concern in a bankruptcy and that the company would be reorganized rather than liquidated. Fitch has assumed a 10% administrative claim. The revolver is assumed to be fully drawn.
The going-concern EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level, upon which Fitch bases the valuation of the company. This leads to a post-reorganization EBITDA estimate of $750 million.
The reduced EBITDA could come about by a rent reset at Windstream (and there are no immediate EBITDA generating benefits received by Uniti in return for the reduction) and/or weakness in other lines of business as fiber contracts are renewed at lower levels.
Post-reorganization valuation uses a 6.0x enterprise value multiple. The 6.0x multiple reflects the high margin, large contractual backlog of revenues, and high asset value of the fiber networks. Fitch uses this multiple for fiber-based infrastructure companies, for which there have been historical transaction multiples in the high single digit range.
The multiple is in line with the range for telecom companies published in Fitch's Telecom, Media and Technology Bankruptcy Enterprise Values and Creditor Recoveries report. The most recent report indicates a median of 5.4x.
Other communications infrastructure companies, such as tower operators, trade at EV multiples exceeding 20x. The tower companies have lower asset risk and higher growth prospects leading to multiples in excess of 20x. Tower operators have low churn as switching costs are high for customers (to avoid service disruptions).
The revolver is assumed to be fully drawn. The recovery analysis produces a Recovery Rating of 'RR1' for the secured debt, reflecting strong recovery prospects (100%); the 'RR5' for the senior unsecured debt reflects the lower recovery prospects of the unsecured debt, given its position in the capital structure.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation that net debt/recurring operating EBITDA is sustained below 5.5x, and REIT interest coverage is 2.3x or higher;
Demonstrated access to the common equity market to fund GCI, other investments or acquisitions.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Net debt/recurring operating EBITDA is expected to be sustained above 6.5x or REIT interest coverage is 2.0x or lower;
If Windstream's rent coverage/rents ratio approaches 1.2x, a negative rating action could occur. Rent coverage is measured as (EBITDAR-net capex)/rents; however, Fitch will also consider Uniti's level of revenue and EBITDA diversi?cation at that time. In determining net capex, Windstream's gross capex would be reduced by GCI funded by Uniti.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Improved Liquidity: As of June 30, 2022, Uniti had approximately $361 million of liquidity (unrestricted cash of approximately $61 million and revolver availability of $300 million).
Uniti was active in the capital markets in 2021, extending the maturities of outstanding debt. Uniti completed a $700 million debt offering in 4Q21, with most of the proceeds used to extend the $600 million of unsecured debt maturing in 2024. Proceeds were also used to prepay a portion of the then outstanding $392 million on the Windstream settlement obligation, which is due in equal quarterly instalments through 2Q25 (approximately $24.5 million). Prepayments will be discounted at 9%.
In February 2021, Uniti issued $1.11 billion of senior unsecured 6.5% notes due in 2029 to fund a tender offer for substantially all of its $1.11 billion of 8.25% senior unsecured notes due 2023 (a small stub was redeemed in April 2021). In April, Uniti issued $570 million of 4.75% senior secured notes due 2028 to fund the redemption in full of its $550 million 6% senior secured notes due 2023.
In December 2020, Uniti amended its revolving credit facility, increasing it to $500 million and extended the maturity date of the commitments to Dec. 10, 2024. The maturity date of the revolver will be subject to an earlier maturity date of 91 days prior to the maturity date of any outstanding debt with a principal amount of at least $200 million, unless its unrestricted cash balance plus remaining revolver availability exceeds the principal amount of such debt at all times following the 91st such day until the maturity of such debt.
The covenant reversion language in the senior secured notes due 2025 is no longer in place since the company's net leverage under the indenture is under 5.75x. The provision had limited the payment of cash dividends to an amount that did not exceed 90% of REIT taxable income, without regard to the dividends-paid deduction and excluding any net capital gains, while net leverage was above 5.75x.
The principal ?nancial covenants in the company's credit agreement require Uniti to maintain a consolidated secured leverage ratio of no more than 5x. The company can incur other debt such that pro forma consolidated total leverage is no more than 6.5x, and if such debt is secured, as long as the consolidated secured leverage ratio does not exceed 4x on a pro forma basis. If the company incurs debt on the RCF, or otherwise, such that total leverage exceeds 6.5x, the RCF will impose material restrictions on Uniti's ability to pay dividends.
Maturities: There are no major maturities until 2024, when $345 million of senior unsecured exchangeable notes mature.
Uniti established an at-the-market common stock offering program in June 2020 that allows for the issuance of up to $250 million of common equity to keep the capital structure in balance when funding capex, as well as to ?nance small transactions.
REIT-required distributions reduce Uniti's FCF, although the company has been able to reduce the dividend to relatively low levels to maintain ?nancial ?exibility. Capital intensity varies by business unit. In the leasing business, capital intensity is virtually non-existent, as capex is the responsibility of the tenant. Intensity is high in the Fiber segment, as the company is in the process of completing Fiber projects.
Issuer Profile
Uniti, which operates as a REIT, was formed through a spinoff from Windstream Holdings, Inc. in April 2015. On a consolidated basis the company has $7.2 billion of revenue under contract, with around 8.5 years of contract term remaining.
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
UNITI GROUP INC. 
