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Recently, we wrote an article that warn investors Uniti Group (UNIT) shares with a high probability of reducing dividends and more Windstream problems (WIN). Fear created new opportunities, Uniti Group, 8.25%, October 15, 2023 bond, Cusip # 20341WAD7 are traded at $ 75. This is an opportunity to earn 11% profit for four years. Yield to maturity (which is the standard quotation for bond yields) today stands at 15% . Details of bonds can be viewed by clicking here.
$ 10,000 brings about $ 1,100 / yr in revenue, and after maturity they will also have 25% growth .
As discussed previously, UNIT has problems maintaining the coverage of dividends. On the other hand, bond payments are well covered by a revised EBITDA of 2.5x over the past 10-Q. The cost of interest is approximately $ 80 million per quarter, while the consolidated EBITDA is $ 199 million in the third quarter.
UNIT was able to increase the adjusted EBITDA. ]
WIN currently has 692 million dollars. EBITDA. Buying Bluebird will add about $ 14 million in annual EBITDA, and fiber will continue to increase its role.
UNIT bonds depend on some revenue from WIN, but this amount is rapidly decreasing. We believe that in extreme cases of bankruptcy by WIN and / or repeated lease negotiations, UNIT will be able to continue to comfortably cover interest payments. Note that the total dividend currently consumes more than $ 420 million in cash each year, UNIT only needs approximately $ 320 million in cash to pay interest.
We believe that UNIT owns very valuable assets that are capable of generating a cash flow that exceeds the current level of production. Difficulty with WIN affects ordinary UNIT stocks and is likely to lead to a reduction in dividends. However, the purpose of this reduction would be to further invest in their current assets to generate more cash flow. This will improve the assets that support these bonds.
The elephant in the room is a speculation about what will happen if WIN falls into bankruptcy.
If WIN does not file a bankruptcy application, they will continue to pay the rent, as it is. As we discussed in our article on ordinary shares of UNIT, we believe that there is a significant risk of reducing the overall dividend for disbursement that can be used to increase capital expenditures. For bondholders, this would be a positive step, since current cash flows will conveniently cover dividend payments, and further investments will increase future cash flows.
If WIN filed for bankruptcy, things can quickly get worse. The best news for UNIT bonds is that WIN will quickly accept a lease, as a reorganized WIN or successor organization goes bankrupt with the same lease.
The other two options are voluntary review of the lease agreement (either before or during bankruptcy) or WIN rejects a lease agreement by forcing negotiations. There are several important things to understand.
- During the shutdown, UNIT received 80% of WIN assets. Although WIN has had some acquisitions and supplements since then, the UNIT network remains critical to providing WIN services to its customers.
- WIN has + $ 1.4 billion in quarterly earnings, and UNIT's rental is $ 173 million / quarter. WIN is designated as the "final instance" because the UNIT network is required to provide WIN services; there are some questions as to whether they can legally reject a lease.
- EBITDA margin UNIT on their lease WIN more than 99%. Even with a significant reduction in the lease, UNIT can still meet the debt service needs
The bottom line is that without the lease of UNIT WIN property can not function. The default is for rent and forcing UNIT to disconnect lines and force the elimination of WIN. Since UNIT lines that combine WIN together do not lease from UNIT, they will substantially reduce the liquidation value of WIN assets. Many assets of WIN can only be used with the UNIT network .
In the interests of all WIN debtors, full revenues continue to flow, while the UNIT lease is an integral part of this. Without a UNIT lease, their potential return would be considerably lower in the liquidation scenario.
As the "final instance", WIN has a legal obligation to provide services in many rural areas. They can not interrupt their services without the approval of state-level commissions. The purpose of these commissions is to ensure that the service continues, regardless of whether the services are profitable for the supplier. In situations where the vendor leaves the area, these commissions are required to ensure that the qualified carrier moves to the background. If necessary, these commissions will be involved in order to continue the services. For any company that replaced WIN as last resort, UNIT network leasing would be much cheaper than creating a new one
Therefore, we believe that the lease will continue and will only be changed by mutual agreement or residual order from the bankruptcy court. UNIT network will continue to be used and they have the right to receive a reasonable rent for this use
We believe that the big issue in the bankruptcy case will be whether the rent is fair. Rental WIN is currently $ 692 million a year and has an annual escalator of 0.5%. It also provides the exclusive use of WIN over the lines, which means that UNIT has no right to lease any unused capacity.
Obviously, an escalator of 0.5% is well below the market standard. For comparison, TPx Rental has an annual escalator of 1.5%, CableSouth Leasing has a 2% annual escalator plus both leases allow UNIT to lease part of its assets to other tenants.
Generally, the WIN lines are not used for maximum power, which means that UNIT can lease additional bandwidth for potential competitors. During the shutdown, WIN did not want to compete in its regions, so the master lease includes a provision that prevents the leasing companies from reaching potential competitors.
In a conference call for the fourth quarter of 2017, management was invited to discuss a lease agreement in exchange for an opportunity
Yes. I apologize. I'm trying to think about what we hear from investors, are there creative ways that we can lower the current rental cost, and I, whether you are willing to do it in exchange for assets or something like that, or the current profit for you coming in the northeast what is still important what would you not intend to diminish what?
Yes. Thank you for your understanding. So, we are not interested in reducing the rent. We said that before and continue to believe that, say, but there are certain ways that Windstream and us could work together to effectively monetize some unused fiber in Uniti leasing, which can benefit both companies. So there are certain opportunities that we will continue to over time. "
Although WIN probably does not like the idea of competition, their cash needs may encourage them to make an agreement with UNIT on this issue. After that, UNIT could receive additional revenues from these lines, which could be done with very small investments and help them diversify their revenue from WIN.
The UNIT leadership consistently agreed that they would not negotiate a lower payment. We believe that the negotiations are possible, despite the previous comments of the management. We believe that lease restructuring to have higher escalators in exchange for lower current payments and / or to come to an arrangement that allows UNIT to lease part of the fiber to other tenants is an obvious and probable moment for negotiations that can reduce the rental of WIN
Hall of talks
Any negotiations on the lease of VIN will be significant negative for ordinary shares, as this will almost certainly lead to a reduction in dividends. UNIT bonds, on the other hand, should only worry about interest coverage. In fact, any reduction in total dividends is positive for UNIT bonds owners. The current cost of interest is approximately $ 320 million a year. This leaves a gap of approximately $ 180 million that needs to be offset by the lease of OH, as well as the amount needed to cover the basic needs of UNIT.
Let's assume that in the extreme scenario, the rental of VIN will decrease to $ 500 million, which is almost 28% off the current lease, which will reduce WIN's liabilities by $ 192 million. At this level, the adjusted EBITDA UNIT will be approximately 640 million Dol US per annum, and the coverage of interest will be approximately 2 times . After an interest rate, they would have approximately $ 320 million a year in cash flow for investment, debt reduction, or other expenses. It should be noted that this scenario would violate the provisions of UNITU regarding their secured institution, which limits the overall position at 6.5h. This breach activates provisions that significantly limit their ability to pay common dividends.
As this will result in a breach of the agreement, we do not believe that UNIT will voluntarily accept such a reduction. This is only to demonstrate that UNIT can continue to pay interest, even with a significant reduction.
For any voluntary negotiations, UNIT will maintain a leverage ratio of no higher than 6.5-year-old EBITDA. This would mean maintaining adjusted EBITDA at around 730 million dollars. USA, which means that the rental WIN must have at least 590 million dollars. Approximately 15% reduction in current lease
A lease reduction of $ 50- $ 100 million is a reasonable negotiating range that will allow UNIT to execute their agreements. We expect that UNIT will require something from WIN, or higher escalators, or the right to lease some assets, which will enable UNIT to expand its EBITDA in the future. Although the management has repeatedly stated that they do not intend to negotiate a lease, we believe that if it is a choice between bankruptcy uncertainty or a discussion of contraction, they will negotiate.
In terms of WIN, their problem is that they have to pay $ 310 million. This is a repayment of bonds already accrued as debts, so if WIN pays it in cash, it actually improves their lending rates. They could also get new funding that would be neutral. This is where potential talks with UNIT begin. WIN discusses a reduction in rent can make a difference in lenders to extend the $ 310 million loan or not. An agreement between WIN, their current lenders and the UNIT should be easily accessible to avoid bankruptcy or to file a previous bankruptcy that protects the interests of all parties. Caa1 rating through Moody's. It issues UNIT bonds as speculative. The rating is primarily due to the association with WIN. The justification of Moody's is that Caa1 CFR Uniti primarily reflects its dependence on Windstream (negative Caa1) for about 70% profit. Uniti's rating will remain Windstream affiliated as long as it can not diversify its revenue stream, so that Windstream represents significantly less than half of Uniti's total revenue. "
The ratings performance continues to be noted by compensation factors such as UNIT's stable returns, high profits, and the strength of the WIN master-leasing agreement.
UNIT has set itself the task of increasing diversification of its revenues to 50%. Due to the impact on their equity capital, we find it unlikely that UNIT will achieve this goal this year. However, they have made significant progress in achieving this goal.
As UNIT takes steps to this, their credit ratings will begin to improve. Any WIN restructuring that results in a minimal change in the underlying lease can also be positive for the UNIT
Investors should be aware that there is a risk with UNIT bonds. As a rule, bonds do not give more than 10%. However, the market reaction was excessive. There is blood on the street, and investors are well compensated for the risk. Finally, these bonds have a relatively short duration of four years, which also reduces the risk.
More about the bond
Panic selling ordinary shares and bonds UNIT has created a new opportunity for UNIT bonds. This is Uniti Group, 8.25% 15oct2023 Cusip # 20341WAD7 which is traded today at a price of $ 75. Investors can now earn 11% profit for four years .
Investments in size $ 10,000 give about $ 1,100 / year income and maturity should also have 25% growth . In fact, the yield to maturity is currently 15% .
Most brokers will allow you to buy UNIT bonds online. I know that Interactive Brokers allows you to do this. All you have to do is enter the purchase number of the UNIT bonds in the "new order" section of the bonds.
Like most bonds, UNIT bonds pay interest twice a year. They go to dividends on April 4, and interest is paid on April 15. Therefore, investors will receive a large payment of interest in less than two months . For example: if you invest $ 10,000 today, you'll receive $ 550 on April 15.
The market hates uncertainty, and now it's a lot with WIN and UNIT. This uncertainty should be solved in the relatively near future. We expect that by the time WIN will announce the fourth quarter earnings, they will declare their intentions as to how they will pay the court's decision and whether they will file a bankruptcy claim.
UNIT Rental is an integral part of WIN's business and there are significant revenues that exist because of the use of UNIT assets. Without the use of UNIT assets, the core value of WIN business has declined significantly. We believe that it is in everyone's interests that the leasing continues in one form or another, either WIN, or a restructured WIN, or a successor organization. In addition, WIN's name as the "carrier of the last resort" may prevent WIN from rejecting the lease even if they so wish.
UNIT has the opportunity to negotiate a lease without violating their agreements. Any negotiations would be a huge negative for their ability to pay common dividends, but there is an opportunity for negotiations that would protect the coverage for bondholders.
This is the uncertainty of the WIN situation affecting the prices of UNIT bonds and stocks. We believe that ordinary stocks continue to have a significant share of risk because of the high probability of reducing dividends in the near future. Bonding is a famed child ejected with water for baths. UNIT owns some very valuable assets. Regardless of whether the assets are leased to OH, restructured by OH or sub-successor, the assets will remain in lease, and the lease will remain sufficient to provide UNIT with a comfortable coverage of interests. We rate UNIT bonds as Strong Buy at current prices, offering a juicy 15-percent yield to supplement potential growth. Any price below $ 82.00 is an agreement.
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