Fitch Comments on Windstream Proposed Split-Off of Directory Publishing Business.

CHICAGO -- Fitch Ratings does not believe Windstream Corporation's (Windstream) proposed split-off of its directory publishing business will have a material effect on its credit profile. Windstream's Issuer Default Rating (IDR) is 'BB+' and the Rating Outlook is Stable for all ratings.

Windstream has announced that it will split-off its directory publishing business in a tax-free transaction. The total value of the transaction is $525 million and will consist of up to $250 million of debt and an exchange for approximately $275 million in common stock. The company has entered into an agreement with Welsh, Carson, Anderson & Stowe (Welsh Carson), a private equity firm, that currently owns approximately 4.1% of Windstream. As part of the transaction, Windstream in effect will exchange shares in the directory business for this stake. The value of the transaction is approximately 7.8 times (x) directory publishing's EBITDA for the twelve month period ending Sept. 30, 2006. Prior to the close of the transaction, the publishing subsidiary will distribute to Windstream approximately $220 million of debt, and pay a $30 million special dividend. Windstream will exchange all or a portion of the debt for existing debt, which will be retired. The $30 million from the special dividend, which represents the tax basis in the directory business, will be used to retire debt or repurchase common equity. To comply with existing indentures, the transaction will take place in two stages. The first share exchange will incorporate 80% of the Windstream shares held by Welsh Carson and take place in the second quarter of 2007. The second exchange for the remaining shares will take place in the fourth quarter of 2007.

Fitch believes the transaction will have a neutral to slightly delevering effect on Windstream. In addition, cash flow will be slightly reduced as the directory business generated approximately $67 million in EBITDA for the latest twelve months. The after-tax contribution to Windstream's cash flow by the directory business is somewhat less and the effect of its loss on free cash flow will be mitigated by lower interest expense as well as a reduced dividend requirement.

Windstream's 'BB+' IDR and Stable Rating Outlook incorporate Fitch's expectations for Windstream to generate strong operating cash flow, stable credit-protection metrics as well as have access to ample liquidity. Fitch's primary concern is the company's dependence on voice service revenues in an environment of increasing competition. The company's financial performance is expected to be relatively stable due to its primarily rural operations. Contributing to its strong operating cash flow are EBITDA margins that Fitch believes will be in the upper end of a 45%-50% range. Fitch forecasts Windstream's dividend payout ratio as a percentage of its net free cash flow in the 70%-75% range. Fitch expects the company to maintain a stable leverage ratio, with debt-to-EBITDA in the 3.2 times (x)-3.3x range over the next few years. Liquidity is supported by the company's $500 million revolving credit facility, which will be in place until July 2011. Debt maturities in the next several years, including the required amortization of its credit facilities, are nominal.

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