Windstream says REIT spin-off plan to cut debt by $3.2 billion, slash leverage ratio to 3.3 times

By Paul Deckelman

New York, July 29 – Windstream Corp. announced plans Tuesday to spin off some of its assets into an independent, publicly traded real estate investment trust – a tax-free transaction which the Little Rock, Ark.-based telecommunications company said will result in a $3.2 billion reduction in its debt load and what its executives said would be an “immediate” drop in its leverage ratio of net debt as a multiple of adjusted OIBDA (operating income before depreciation and amortization) to 3.3 times.

The debt-to-OIBDA ratio currently stands at 3.8 times – but Windstream’s chief financial officer, Anthony W. “Tony” Thomas, said that after it drops to 3.3 times, the newly slimmed-down Windstream would ultimately have a 3.0 times leverage target.

Thomas is scheduled to leave Windstream to become the chief executive officer for the new and as-yet- unnamed REIT once the transaction closes, although he will remain in his current post for now as the company seeks a successor.

During a conference call, Thomas and Windstream’s president and CEO, Jeff R. Gardner outlined the details of the coming transaction, which is expected to close in the first quarter of 2015. Gardner said that the deal “is expected to be modestly credit-enhancing for Windstream’s secured and unsecured debt.”

The transaction, he continued, “creates value by unlocking cash flow, to deleverage faster and accelerate network investments, while maintaining attractive capital allocation policies and offering the potential for an increased aggregate [equity] trading value.”

Swap new debt for old debt

Thomas said that the REIT would raise some $3.5 billion in new debt to effect the transaction. It will take out about $2.2 billion of existing Windstream debt via a debt-for-debt exchange, and will make a cash distribution of $1.2 billion to its former parent, which will primarily fund retirement of additional Windstream debt.

According to Windstream’s most recent 10-Q filing with the Securities and Exchange Commission, the company’s corporate parent, Windstream Holdings Inc., had some $8.71 billion of consolidated total debt outstanding at the end of the 2014 first quarter on March 31, consisting of $88.7 million of current maturities and $8.62 billion of long-term debt less current maturities.

Among other items, the capital structure included $2.57 billion of senior credit facility debt split into four separate term loan tranches coming due between 2016 and 2019; senior secured revolver borrowings totaling $610 million and coming due in December 2015; some $4.95 billion of senior unsecured notes split into seven tranches coming due between 2017 and 2023; and $450 million of notes due 2018 still outstanding from the company’s 2011 acquisition of sector peer Paetec Holding Corp., which included some debt assumption.

A spokesman for Windstream told Prospect News on Tuesday that “we will evaluate and make the determination on which debt will be repaid closer to the completion of the transaction,” and said that “the same is true for the REIT's debt plans,” in terms of what type of debt financing it will enter into.

With a reduced debt load and correspondingly lower interest payments – the company projects pro-forma net debt for the end of this year of $5.25 billion for the post-transaction Windstream versus its previous year-end expectation of $8.5 billion – “this transaction unlocks free cash flow, enabling Windstream to invest more in several important growth areas,” Thomas said, “including broadband investments, to enable faster internet speeds and more robust performance to consumers.

“In addition, Windstream will be able to make a faster transition to an IP [internet protocol] network and pursue additional fiber expansion that will strengthen the infrastructure and enhance services.”

REIT structure an advantage

As for the REIT – which will now own Windstream’s existing fiber-optic and copper-wire networks and other real estate, leasing them back to Windstream for its use via a long-term exclusive triple-net agreement with an initial estimated rent payment from Windstream to the REIT of $650 million per year – upon the separation of the two companies, it will have pro-forma net debt of $3.4 billion and pro-forma leverage of 5.4 times, “which is in line with other triple-net REITs,” Thomas said.

He said that the REIT will also be able to acquire other telecommunications assets and make similar lease deals with other telecom operators going forward, providing additional revenues.

During the question-and-answer portion of the call following the formal presentations by Gardner and Thomas, the CEO said that the new REIT “should have a very nice weighted-average cost of capital with this structure.”

Windstream envisions that because the REIT will have what Thomas called “a flexible balance sheet” with additional leverage capacity, it will provide the former parent with an attractive financing option by helping it fund future capital investments via its lower cost of capital.

Gardner said that “the REIT will generate sustainable and predictable free cash flow, supported by the long-term lease with Windstream. It will be capitalized in a manner intended to provide strong returns to shareholders, with the ability to de-lever over time.”

Thomas said that with Windstream seeing the transaction as “modestly credit-enhancing” as the company takes out $3.2 billion of debt and “immediately” deleverages to 3.3 times from 3.8 times, “we’re confident that the rating agencies will have a similar perspective when they release their views.”

© 2015 Prospect News.
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