Fitch Rates Windstream's Proposed $400MM Debt Offering 'BB+'; Outlook Stable

CHICAGO-(Business Wire)-September 29, 2009 - Fitch Ratings has assigned a 'BB+' rating to Windstream Corporation's (Windstream)(NYSE: WIN) proposed offering of $400 million of senior unsecured notes due 2017. Windstream's Issuer Default Rating (IDR) is 'BB+' and the Rating Outlook is Stable.

The company is expected to use the proceeds from the offering to fund the cash portion and other expenses associated with pending acquisitions as well as for general corporate purposes. The acquisitions of D&E Communications Inc. (D&E) and Lexcom, Inc. (Lexcom) are expected to close in the fourth quarter of 2009 and require approximately $400 million to complete.

Concurrent with the senior note offering, the company is seeking certain amendments to its senior secured credit facilities, which are rated 'BBB-', as well as extend their maturities. The maturity of the $500 million revolving credit facility (undrawn as of June 30, 2009) and the term loan A, which had $283 million outstanding on June 30, 2009, will be extended from July 2011 to July 2013. The term loan B, which had a $1.372 billion balance outstanding on June 30, 2009, will be extended from July 2013 to December 2015. The amendment and extensions result in certain increased fees, including increased interest rates on loans with extended maturities.

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 June 30, 2009, guarantor subsidiaries held 50%, or approximately $3.9 billion, of Windstream's total assets. Principal financial covenants in the credit facilities require a minimum interest coverage ratio of 2.75 times (x) 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.

Windstream's 'BB+' ratings and the Stable Outlook incorporate expectations for the company to generate strong operating and free cash flows, to maintain relatively stable credit protection metrics and to have access to ample liquidity. Concerns regarding the company's credit profile include the effect of the recession and competition on its operations.

Fitch believes the company's 2009 gross debt-to-EBITDA ratio could slightly exceed 3.4x—moderately higher than historical levels—due to the completion of pending acquisitions and an approximately $90 million increase in non-cash pension cost. On a net debt-to-EBITDA basis, Fitch believes leverage in 2010 should remain within the company's 3.2x to 3.4x historical range.

Windstream's liquidity on June 30, 2009 was strong, given its $245 million in cash on the balance sheet, and approximately $493 million available on its revolver (net of outstanding letters of credit). Assuming all lenders in the revolving and term loan A facilities agree to extended the maturity dates to 2013 from 2011, upcoming maturities are nominal at $24 million annually through 2012. Liquidity is also supported by free cash flow, which Fitch estimates will be in the $250 million to $300 million range for 2009. Capital spending, per the company's guidance, is expected to range from $290 million to $320 million.

As of June 30, 2009, Windstream had approximately $167 million remaining under its two-year $400 million stock-repurchase program initiated in February 2008. The stock-repurchase plan expires at the end of 2009. Given its current liquidity position and free cash flow generation, Fitch believes repurchases are manageable given the size of the program relative to the company's excess free cash flows.

To finance the D&E acquisition, Windstream will pay $73 million in cash and will issue approximately 9.5 million shares. D&E Communications' estimated net debt of $171 million comprises the remainder of the transaction value and consists principally of term loans that may be refinanced. D&E generated EBITDA of $64 million for the 12 months ended June 30, 2009, and Windstream anticipates realizing $25 million in annual synergies in operating expenses and capital expenditures savings following the integration of D&E.

Windstream will acquire Lexcom for approximately $141 million in cash. Lexcom had $44 million in revenue in 2008 and generated EBITDA approximating $24 million. Windstream expects to achieve $5 million in synergies after the merger closes.

Fitch believes that Windstream is likely to continue to evaluate potential acquisitions. Consolidation would be a long-term positive factor for rural local exchange carriers in Fitch's view, but does carry execution and financing risks.

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.

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