Windstream earnings dip in 3Q amid weakness in enterprise unit, focus remains on turnaround

Windstream’s revenue softened in 3Q20, driven by lower customer bookings in the company’s enterprise business, according to two sources familiar with the situation. EBITDAR further fell as margins in the segment contracted, the sources said.

For the quarter ended 30 September, the communications and software company generated USD 387m of EBITDAR, marking a 6% slump from last year, the sources noted. Revenue clocked in 8% lower year-over-year at USD 1.16bn, they added. Windstream’s kinetic business brought in flat to slightly higher earnings compared to last year, while earnings in the wholesale business remained largely unchanged for the quarter, the sources said. 

While management said margins in the enterprise business should bounce back to a normalized 20% area in 4Q20, Windstream needs time to grow its customer base to stabilize the segment’s sales, which account for 50% of its overall revenue, the sources said. 

The issuer is expected to offset weakness in the enterprise division with a successful buildout plan in its kinetic business aimed at increasing fiber access to homes with augmented broadband speeds over the next five years, at which point its capex needs will fall off and the borrower will be better positioned to engage with highly competitive end markets, as reported. 

“The next 18-24 months are all about execution with the fiber expansion and whether they’re adding subscribers at the rate they want to,” one of the sources said. The buildout will prop up earnings, while giving Windstream time to stabilize performance in the enterprise segment, the sources noted.

“If Windstream successfully executes on its strategy to profitably grow its consumer broadband subscriber base while moderating enterprise revenue declines, we believe the company could reverse top-line and EBITDA declines, enabling it to reduce leverage over time, although this is currently not incorporated in our base-case forecast,” an S&P analyst wrote in a 6 August ratings report

As of 30 September, liquidity totaled USD 638m, with USD 167m of cash and USD 500m of revolver availability, less USD 29m of letters of credit, the sources continued.

On a net basis, the company is 2.1x levered, based on roughly USD 963m of LTM adjusted EBITDA and USD 2.025bn of total net debt. 

Windstream emerged from bankruptcy as a private company in September after slashing more than USD 4bn or roughly two-thirds of its debt load. The company filed for Chapter 11 in February 2019 after a district court judge ruled that Windstream Services’ 2015 spinoff of certain telecommunications network assets into a new publicly traded real estate investment trust (REIT), Uniti Group, violated its bondholder agreement. The decision arose from a lawsuit lodged by bondholder Aurelius Capital Management and indenture trustee US Bank that the spinoff was invalid under the terms of the debt agreement.

The Chapter 11 plan gave prepetition first lien lenders 100% of the company’s reorganized equity, subject to dilution by a USD 750m rights offering, a backstop commitment premium and a management incentive plan. 

Windstream’s USD 1.4bn 7.75% senior secured notes due 2028 last traded yesterday at 101 to yield 7.5%, in line with trades before the earnings report on 16 November, according to MarketAxess. 

Its USD 750m Libor+ 625bps term loan due 2027 recovered to the 97.406/98.344 context over the last two days, after an initial drop-off following the earnings report to 95.5/97.5 on 18 November from pre-earnings trades at 97.4/98.55, according to Markit. 

Windstream declined to comment. 

2020 Debtwire

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