OREANDA-NEWS. Fitch Ratings has initiated ratings on Communications Sales & Leasing, Inc. (CS&L) and its co-issuer CSL Capital, LLC by assigning a 'BB' Issuer Default Rating (IDR). The Rating Outlook is Stable.

Fitch Expects to assign the following ratings:

Communications Sales & Leasing, Inc. and CSL Capital, LLC
--Senior secured revolving credit facility due 2020 of 'BBB-/RR1';
--Senior secured credit facility due 2022 of 'BBB-/RR1';
--Senior secured notes 'BBB-/RR1'; and
--Senior unsecured notes of 'BB/RR4'.

The debt ratings are subject to the receipt of final documentation. CS&L is expected to be spun off from Windstream Holdings, Inc. (NASDAQ: WIN) by the end of April 2015.

KEY RATING DRIVERS

Very Stable Cash Flow: Initially, nearly all of CS&L's revenues will consist of revenues under a master lease with Windstream, under which Windstream will have exclusive access to the assets. The lease is expected to approximate \$650 million annually. As a result, CS&L is expected 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 would be at least 15 years in the future, and up to 20 if Windstream exercises an option to have CS&L fund certain capital spending projects. 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: The 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.

Untested Business Model: CS&L will own mainly fiber and copper assets that it will lease back to Windstream, which will continue to operate the retail business, and own all of the electronics associated with providing telecom services. While the sale and leaseback of assets in the telecom industry is not unprecedented (for example, the tower companies), it is untested in the fixed wireline business.

Tenant Concentration: The master lease with Windstream provides a steady cash flow stream but until the CS&L strikes deals with other companies, its revenue stream will be undiversified. Therefore CS&L's IDR will be initially capped at Windstream's 'BB' IDR.

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.

Tenant's Business: Windstream derives more than 70% of revenues from business services (including the carrier market) and consumer broadband markets. At the same time, there is still secular pressure on legacy voice and regulatory-derived revenues (switched access and universal service funding). As the legacy revenues dwindle in the mix, there will be less pressure on revenues going forward. The company has positioned its business service offerings to target mid-sized businesses. For a pure wireline operator, Windstream's revenues are somewhat more diversified than other wireline operators as acquisitions have brought additional business and data services revenue. Windstream experienced a nominal 0.2% decline in business service revenue in 2014. Fitch has expected business service revenue growth to offset pressures elsewhere, but business voice service revenues continue to decline. There is pressure in the fiber to the tower (FTTT) business that will subside and this arises from the migration to fiber circuits from copper circuits. Fiber provides greater capacity at a lower cost than copper to customers but revenues should grow longer term. This pressure should dwindle in 2015.

No Material Near-Term Maturities: The anticipated debt issuances will not mature for five years at the earliest, with the revolver having the shortest at a five-year term. The remaining term loan and note issuances are expected to have maturities in the seven-year to 10-year range.

REIT Formation: CS&L is expected to raise approximately \$3.65 billion of debt prior to the spin-off. Net proceeds, through a debt for debt exchange, a cash transfer, plus a 19.9% stake retained by Windstream in CS&L will be exchanged for Windstream's assets. Windstream will monetize the remaining stake over a one-year period.

Leverage: At inception, CS&L's gross leverage is expected to approximate 5.7x and remain stable over the near term.

Liquidity: CS&L is expected to have a \$500 million credit facility to provide for liquidity needs, as well as approximately \$100 million of cash. Although not expected, should a purging dividend be required, it will likely be financed by the revolving credit facility.

KEY ASSUMPTIONS

--Fitch assumes CS&L spins-off from Windstream in April 2015, following successful debt offerings.

--CS&L's primary revenue stream will be the payments received from Windstream under the master lease and will be \$650 million annually. Fitch assumes Windstream will 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 are no assumptions regarding revenues from other assets financed by CS&L.

--Virtually all capital spending consists of investments requested by Windstream. CS&L is expected to distribute all REIT earnings to shareholders.

RATING SENSITIVITIES

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 5.25x 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.