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Windstream's Ratings Unaffected by Proposed Acquisition of PAETEC Holding Corp.

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^{Published in Science and Technology on Monday, August 1st 2011 at 14:26 GMT by Market Wire}  

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings believes Windstream Corporation's (Windstream) (NYSE: WIN) proposed acquisition of PAETEC Holding Corp. (PAETEC) in a transaction valued at approximately $2.3 billion will not affect its ratings. Windstream's Issuer Default Rating (IDR) is 'BB+', and the Rating Outlook is Stable.

Fitch believes the proposed acquisition is consistent with its current rating rationale regarding Windstream, which incorporates the diversification of revenues and cash flow through the expansion of its business services revenue base. In addition, Windstream is using a material proportion of equity to finance the transaction, as it has with respect to other recent acquisitions, thus minimizing the effect on its credit profile. Fitch estimates that prior to synergies, the acquisition will increase leverage approximately 0.1 times (x) upon closing.

PAETEC provides telecom services to business customers through a 100,000 route mile nationwide fiber optic network and the operation of 20 data centers. The transaction complements Windstream's acquisitions over the past two years in business services, which have included providers of competitive local exchange services, data hosting services and fiber optic transport services. The transaction will be all-stock, consisting of approximately $900 million of Windstream equity. PAETEC has approximately $1.4 billion outstanding in net debt, including $650 million of senior secured notes and $750 million of senior unsecured notes. Windstream will assume the notes, but to address the potential change of control provisions in PAETEC's notes, Windstream has obtained $1.1 billion in financing commitments which, in combination with capacity on its revolving credit facility, would enable Windstream to refinance the notes if necessary. In connection with the transaction, Windstream is seeking certain amendments to its credit facility, and if obtained, the company would guarantee the PAETEC notes upon the consummation of the transaction. The transaction is expected to close in approximately six months.

Windstream's ratings incorporate expectations for the company to generate strong operating and free cash flows and to have access to ample liquidity. Fitch's principal concern is the effect of competition for consumer voice services on the company's operations, a factor being diminished by recent transactions. There is some risk regarding the integration of the PAETEC acquisition, but in Fitch's view the risk is likely to be modest, owing to the company's experience with acquiring and incorporating small- and medium-sized acquisitions.

PAETEC's EBITDA (pro forma for acquisitions) was approximately $356 million over the last 12 months ended March 31, 2011. Following the acquisition, Windstream expects to realize approximately $100 million in annual synergies by the third year of the transaction. Excluding the PAETEC acquisition, which may not close until early 2012, Fitch estimates Windstream's 2011 leverage will approximate 3.4 times (x), at the upper end of the company's 3.2x to 3.4x historical range. Fitch's prior expectations for leverage in 2012 reflected a modest 0.2x decline in leverage; excluding $50 million in operating integration costs, Windstream's leverage in 2012 could still decline slightly.

On March 31, 2011, Windstream had $690 million available on its $1.25 billion revolver (due December 2015) and $36 million of cash on its balance sheet. In March 2011, the capacity of Windstream's revolving credit facility was increased to $1.25 billion from $750 million. Principal financial covenants in Windstream's secured 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.

Maturities for the 12 month periods ending in March 31, 2012 and 2013 approximate $138 million and $44 million, respectively. In Fitch's view, free cash flow will be sufficient to repay maturing debt. Fitch expects free cash flow for Windstream to be in the $350 million to $450 million range in 2011. Capital spending is expected to rise in 2011 to a range of $520 million to $580 million from $415 million in 2010.

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

Applicable Criteria and Related Research:

--'Rating Global Telecoms Companies' (Sept. 16, 2010);

--'Corporate Rating Methodology' (Aug. 16, 2010).

Applicable Criteria and Related Research:

Rating Global Telecoms Companies - Sector Credit Factors

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205 ]

Corporate Rating Methodology - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

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