Fitch: Windstream's Acquisition of Nuvox Neutral to Credit Profile

In Fitch's view the transaction, on balance, is neutral to Windstream's credit profile. Prior to the realization of any synergies, the transaction is not expected to have an effect on Windstream's leverage as a result of the relatively small size of the transaction and the use of cash on hand and equity to fund a portion of it Following the close of the transaction, the realization of the approximately $30 million in cost and capital expense synergies and incremental cash flow is expected to have a positive effect on credit metrics. In Fitch's view, Windstream will also benefit modestly from the revenue diversification brought about by the addition of Nuvox's small- and mid-sized business customer base. After the transaction closes, more than one-half of revenues will come from broadband and business sources, thus reducing the proportion from competitively pressured residential sources. Nuvox is a competitive local exchange carrier (CLEC) with operations in the Southeast and Midwest U.S. that complement Windstream's incumbent footprint and small CLEC business.

Following the close of the Nuvox transaction in the first half of 2010 and the closing of the previously announced acquisitions of D&E Communications Inc. (D&E) and Lexcom, Inc. (Lexcom) in the fourth quarter of 2009, Fitch believes Windstream's 2010 net debt-to-EBITDA will be at the upper end of the company's 3.2 times (x) to 3.4x historical range. As a result, Fitch believes Windstream will have limited capacity within the current rating category to take on additional leverage in funding potential acquisitions over the next 12 months.

The Nuvox transaction has a total value of $643 million. Windstream will issue approximately 18.7 million shares with a value of $183 million based on the Nov. 2, 2009 closing price and pay $280 million in cash. The company will also assume estimated net debt of approximately $180 million. Nuvox's EBITDA, normalized for certain items, was $115 million in the 12 months ending June 30, 2009, and Windstream expects to generate approximately $30 million in operating cost synergies and capital expense savings once the transaction closes.

Windstream expects to finance the Nuvox transaction through cash on hand and drawings on its $500 million revolving credit facility. Financing for the D&E and Lexcom transactions was completed in September 2009 when Windstream raised approximately $400 million in an offering of unsecured debt.

Concurrent with the unsecured offering, the company extended the maturity of $348 million of the $500 million revolving credit facility from July 2011 to July 2013, with the maturity of the remainder remaining July 2011. Windstream also amended its senior secured term loan facilities to extend their maturities. The maturity of $168.9 million of the $283 million outstanding on term loan A will be extended from July 2011 to July 2013. Term loan B, which has a $1.368 billion balance outstanding, will have the maturity of approximately $1.078 million extended from July 2013 to December 2015. The amendment and extensions resulted in certain increased fees, including increased interest rates on loans with extended maturities.

Principal financial covenants in the 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.

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). Other than the portion of the revolver and term loan A facility maturing in 2011, upcoming maturities are nominal 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.

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SOURCE: Fitch Ratings

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