Updated Covenants Tear Sheet for Uniti Group; Significant Flexibility for Refinancings and Asset Transfers After December Amend-and-Extend

Relevant Items:
Uniti Group Debt Documents
Debt Document Summaries and Covenants Tear Sheet

We have updated our covenants tear sheet for Uniti Group, to account for various recent debt transactions, and also posted summaries for the company’s revolver agreement and indentures. Continue reading for our Americas Covenants team's analysis of the updated Uniti Group covenants tear sheet and Request a Trial for access to the linked debt documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.

Uniti Group Inc. is a publicly traded REIT that is structured as an “up-REIT.” The company provides wireless infrastructure services to the communications industry, and in 2015 it was spun off from Windstream Holdings Inc. Revenue under various leases with Windstream accounts for a substantial portion of Uniti’s revenue: 66.1% of YTD revenue as of Sept. 30, 2020.

In early 2020 Uniti refinanced and terminated its term loans, and in December 2020 the company amended and extended its revolver, increasing commitments by $142 million and extending the bulk of the facility to a 2024 maturity. The company also recently closed a tender for its unsecured 2023 notes, refinancing that maturity to 2029, with a $59 million stub amount of unsecured 2023s expected to be redeemed at par in mid-April. The company also has $550 million of secured 2023 notes, and that series becomes callable at 101.5, also in mid-April. Because the company had only $137 million of cash and cash equivalents as of September 2020, pro forma, it may be planning to come to market again, to refinance the secured 2023 notes.

Uniti Group’s capital structure as of Sept. 30, 2020, pro forma for recent transactions, is illustrated below:

 

 

• Liquidity and financial covenants - As of Sept. 30, 2020, pro forma for the refinancing transactions and revolver upsize, the company had liquidity of $567.3 million, consisting of $136.8 million of cash and equivalents and $430.5 million of revolver availability. The revolver agreement contains a single financial covenant: a quarterly tested 5.00x total secured leverage covenant.We estimate that the secured leverage ratio was approximately 3.7x as of Sept. 30, 2020, pro forma for recent transactions (using reported LTM adjusted EBITDA of $806 million as of Sept. 30 as a rough proxy for covenant EBITDA and $2.98 billion of pro forma secured debt). Those figures suggest that the covenant permits additional secured debt of about $1 billion.


• Debt and liens - The revolver agreement and secured 2025 notes are the main limiters on secured debt incurrence. The revolver agreement may contain more than $1 billion of secured debt capacity, but that amount is likely capped out by the 5.00x secured leverage covenant.We estimate that the secured 2025 notes permit additional first lien debt of $869 million and second lien debt of $369 million. The secured 2025 notes also cap nonguarantor debt at $50 million until the company achieves a 5.75x net leverage ratio, and we estimate that pro forma net leverage is presently around 6.1x. Capacity for additional unsecured debt is significant, but additional unsecured debt in excess of about $200 million would likely require using debt capacity that could otherwise be used to incur secured debt.


• Dividends, asset transfers and junior debt prepayments - REIT-status dividends are uncapped, and there is likely also a significant amount of capacity for other dividends. Although all of the company’s debt agreements contain general restricted payment baskets sized at only $100 million, they all also contain builder baskets that are likely accessible and contain, assuming no prior usage, more than $2 billion of capacity.Under the revolver and all of the notes, the builder baskets build from a backdated date of April 1, 2015, by cumulative adjusted funds from operations, plus/less typical adjustments, plus a $50 million starter amount. Company-reported cumulative AFFO from April 2015 to Sept. 30, 2020, was $2.23 billion, 95% of which is $2.12 billion, plus the $50 million starter amount, for estimated builder basket capacity of $2.17 billion, assuming no prior usage. Access to the builder baskets is conditioned on satisfying a 6.5x total leverage test (or a 6.5x net leverage test under the unsecured 2029 notes), and we estimate that pro forma total leverage is 6.2x. Therefore, the builder baskets potentially contain a significant amount of capacity for non-REIT dividends.
  
  The builder baskets can also be used to make investments (i.e., transfer assets away from the credit group) and prepay junior debt, as is typical. Before the revolver agreement’s December 2020 amend-and-extend, the revolver agreement generally prohibited unrestricted subsidiary transactions. But under the terms of the December 2020 amendment, those restrictions have been removed. Similar to dividend capacity, asset transfer capacity mostly hinges on how much capacity remains in the builder baskets, but now, under the revolver agreement, various other investment baskets are also available, which could not have been used previously for asset transfers.
  
  As to junior debt prepayments, the revolver restricts the company from prepaying the unsecured 2024 notes and any other unsecured notes classified under the agreement’s ratio debt basket, but there is a 4.0x secured leverage prepayment basket. We estimate that that ratio was 3.7x as of Sept. 30, 2020, pro forma. As long as the company maintains secured leverage of less than 4x, then the revolver will not block the company from prepaying its existing unsecured notes. Also, the prepayment covenant generally always permits the company to refinance its existing unsecured notes with unsecured structurally pari refinancing debt, as is typical.
  
  The revolver’s prepayment covenant will not be triggered if the company prepays its earliest upcoming maturity, the $550 million of secured 2023 notes. By the beginning of 2023 the company must reduce the outstanding amount of secured 2023s to less than $200 million or else risk triggering a springing maturity under the revolver. The maturity of the revolver’s 2024 tranche springs to 91 days before the maturity of any debt of $200 million or more, unless liquidity (the sum of unrestricted cash and equivalents of the restricted group plus unused revolver commitments) is equal to or greater than the outstanding principal of such debt until the maturity of such debt.

More granular details about the company’s covenant restrictions are available in our updated covenants tear sheet and debt document summaries.