OREANDA-NEWS. According to Fitch Ratings, Communications Sales & Leasing Inc.'s (CS&L) and CSL Capital, LLC's Issuer Default Ratings (IDRs) and security ratings are not affected by the announcement of the reorganization of the company into an umbrella partnership real estate investment trust (UP-REIT) structure. CS&L and its co-issuer CSL Capital, LLC, have long-term IDRs of 'BB-'/Stable Outlook.

In conjunction with a repricing of its existing $2.1 billion term loan B due October 2022, CS&L is seeking a technical amendment to its bank agreement that would allow the company to put an UP-REIT structure in place. With this structure, CSL Capital would continue to be an obligor on the existing debt, and CS&L Operating Partnership will replace CS&L (which will become a guarantor) as an obligor on the outstanding debt. There would be no change to the underlying assets securing the debt or guarantors of the outstanding debt and the financial covenants will remain the same. Therefore, in Fitch's view, the IDRs and issue ratings are not affected by the technical amendment.

Fitch anticipates assigning an IDR to CS&L Operating Partnership prior to completion of the amendment and repricing of the term loan.

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 the August 2016 Tower Cloud acquisition. On a pro forma basis, Fitch estimates June 30, 2016 gross leverage (total debt/EBITDA) of approximately 5.7x assuming 50% equity treatment for the preferred stock issued in the PEG Bandwidth transaction. 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, we expect CS&L to finance any transaction such that gross leverage would 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: A substantial portion 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 Windstream could opt not to renew certain 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 years 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 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 though 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: Fitch notes that CS&L's master lease is with Windstream Holdings (Holdings) and that 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.

KEY ASSUMPTIONS

--CS&L financed the PEG Bandwidth transaction with a mix of cash, stock (1 million CS&L shares and convertible preferred stock.

--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 ask 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.

RATING SENSITIVITIES

Positive: 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: 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.

LIQUIDITY

CS&L's $500 million revolving credit facility (due 2020), which had $273 million available following the Tower Cloud acquisition, provides sufficient backstop for liquidity needs. We expect CS&L will restore revolver availability following transactions by terming out borrowings over time by more permanent means of equity and debt funding. The company had $49 million in cash at June 30, 2016.

Fitch currently rates CS&L and CSL Capital, LLC as follows:

--Long-Term IDR at 'BB-'/Stable Outlook;

--Senior secured revolving credit facility due 2020 at 'BB+/RR1';

--Senior secured credit facility due 2022 at 'BB+/RR1';

--Senior secured notes at 'BB+/RR1';

--Senior unsecured notes at 'BB-/RR4'.