Fitch: Communications Sales & Leasing's Ratings Unaffected by Tower Cloud Acquisition
The acquisition is in line with Fitch's expectations for M&A activity managed within CS&L's target leverage, which should approximate the mid-5x range over the longer-term. Fitch expects the Tower Cloud acquisition to increase gross leverage by less than 0.2x, and pro forma for both the Tower Cloud acquisition and the May 2016 PEG Bandwidth acquisition, gross leverage based on first quarter 2016 annualized EBITDA approximates 5.9x.
Total consideration for the Tower Cloud acquisition is $230 million. A total of $180 million of the initial consideration will be funded with a combination of available cash on hand and borrowings under CS&L's revolver, and the remainder will be financed through the issuance of common stock. The transaction is conditioned upon necessary regulatory approval that is expected to occur in late third-quarter 2016 or early fourth-quarter 2016.
KEY RATING DRIVERS
Slight Rise in Leverage: CS&L's financial leverage is expected to rise as a result of the May 2016 PEG Bandwidth acquisition and pending Tower Cloud acquisition. On a pro forma basis, Fitch expects gross leverage (total debt to EBITDA) of approximately 5.9x assuming 50% equity treatment for the preferred stock issued in the PEG Bandwidth transaction. This compares to leverage of approximately 5.5x at the end of the first quarter 2016. Based on management comments about opportunities within a robust transaction pipeline and desire to diversify across various asset classes, Fitch anticipates that CS&L will announce further transactions. As these opportunities come to fruition, Fitch expects CS&L to finance any transaction such that gross leverage should remain relatively stable, with some fluctuations due to M&A activity, and should approximate the mid-5x range over the longer-term.
Very Stable Cash Flow: Nearly all of CS&L's current revenues consist of revenues under a master lease with Windstream, under which Windstream has exclusive access to the assets. The lease is currently expected to approximate $653 million annually. Fitch expects CS&L to have very stable cash flows, owing to the fixed (and modestly increasing) nature of the long-term lease payments and Windstream's responsibility for expenses under the triple-net lease. The term of the master lease is for an initial term of 15 years. There is some risk at renewal that under the 'any or all' provision at renewal that Windstream could opt not to renew markets, or could renegotiate terms at such time for those markets.
However, this renewal risk is well into the future, given the initial 15-year term of the lease, (and up to 20 if Windstream requests and CS&L elects to fund certain capital spending projects totalling $250 million over five years). Fitch expects all markets to be renewed under the master lease, since Windstream would either have to incur significant capital expenditures to overbuild CS&L or find a buyer for its operating assets (routers, switches, etc.) and successor tenant for its leased assets. Protection is provided to CS&L by the terms of the master lease, which could require Windstream to sell its operating properties in the event of default. CS&L's facilities would be essential to the operations of Windstream on a going-concern basis, or a successor company.
Geographic Diversification: Windstream's operations subject to the master lease are geographically diversified among 37 market areas. The indivisible nature of the Master Lease mitigates the effect of a weak market area(s) on CS&L. About two-thirds of the fiber and copper route miles are located in Georgia, Texas, Iowa, Kentucky and North Carolina. PEG's fiber network serves seven markets in the Northeast Mid-Atlantic, Illinois and South Central regions.
Tenant Concentration: The master lease with Windstream provides a steady, although undiversified cash flow stream. Therefore CS&L's IDR is initially capped at Windstream's 'BB-' long-term IDR until CS&L strikes deals with other companies to meaningfully diversify its operations through transactions where 25%-30% of its revenue is derived from tenants with a credit profile materially stronger than Windstream's. Fitch views the PEG and Tower Cloud transactions positively as such transactions begin to diversify CS&L's revenue base.
Seniority: CS&L's master lease is with Windstream Holdings (Holdings), and Holdings is subordinate to the operations at Windstream Services. However, Fitch believes CS&L's assets will be essential to Windstream Services operations and a priority payment.
No Material Near-Term Maturities: CS&L does not have any maturities for four years at the earliest, with the revolver having the shortest maturity in 2020. The remaining term loan and note issuances have maturities in 2022 and 2023 respectively.
--CS&L financed the PEG Bandwidth transaction with a mix of cash ($315 million), stock (1 million CS&L shares and convertible preferred stock ($87.5 million).
--CS&L's primary revenue stream will be the payments received from Windstream under the master lease and are currently approximately $653 million annually. Fitch assumes Windstream may request CS&L to finance $50 million of capital spending over the next five years per the terms of the master lease, generating additional revenue. There is no binding commitment on the part of CS&L to provide funding.
--Virtually all capital spending consists of investments requested by Windstream. CS&L is expected to distribute all REIT earnings to shareholders.
--CS&L will target long-term gross leverage in the mid 5x range.
Positive Action: A positive action is unlikely in the absence of an upgrade of Windstream, although an upgrade could be considered if CS&L targets debt leverage of 5.2x to 5.3x or lower and 25% - 30% of its revenue is derived from tenants with a credit profile materially stronger than Windstream's.
Negative Action: A negative rating action could occur if debt leverage is expected to approach 6x or higher for a sustained period. In addition, a downgrade of Windstream would likely result in a similar downgrade of CS&L in the absence of greater revenue diversification. Also, the acquisition of assets and subsequent leases to tenants that have a weaker credit and operating profile than Windstream could affect the rating, if such assets are a material proportion of revenues.
CS&L's $500 million revolving credit facility (due 2020), which had $329 million available following the PEG Bandwidth acquisition and pro forma for a June 2016 note offering, provides sufficient backstop for liquidity needs. Fitch expects CS&L will restore revolver availability following transactions by terming out borrowings over time by more permanent means of equity and debt funding. Cash was $165 million at March 31, 2016.
Fitch currently rates CS&L and CSL Capital, LLC as follows:
--Long-term IDR 'BB-';
--Senior secured revolving credit facility due 2020 'BB+/RR1';
--Senior secured credit facility due 2022 'BB+/RR1';
--Senior secured notes 'BB+/RR1';
--Senior unsecured notes 'BB-/RR4'.