Windstream 2006 Annual Report Download - page 121

Windstream’s senior secured and senior unsecured credit ratings with Moody’s Investors Service (“Moody’s”),
Standard & Poor’s Corporation (“S&P”) and Fitch Ratings (“Fitch”) were as follows at December 31, 2006:
Description Moody’s S&P Fitch
Senior secured credit rating Ba1 BBB- BBB-
Senior unsecured credit rating Ba3 BB- BB+
Outlook Stable Negative Stable
Factors that could affect Windstream’s short and long-term credit ratings would include, but are not limited to, a
material decline in the Company’s operating results, increased debt levels relative to operating cash flows resulting
from future acquisitions or increased capital expenditure requirements or changes to our dividend policy. If
Windstream’s credit ratings were to be downgraded from current levels, the Company would incur higher interest costs
on its borrowings, and the Company’s access to the public capital markets could be adversely affected. A downgrade in
Windstream’s current short or long-term credit ratings would not accelerate scheduled principal payments of
Windstream’s existing long-term debt.
The terms of our senior secured credit facilities and indentures include customary covenants that, among other things,
require the Company to maintain certain financial ratios and restrict our ability to incur additional indebtedness. In
particular, under the senior secured credit facilities, the Company must maintain the following financial ratios:
(a) total leverage ratio must be no greater than 4.5 to 1.0 on the last day of any fiscal quarter;
(b) interest coverage ratio must be greater than 2.75 to 1.0 on the last day of any fiscal quarter.
The leverage ratio is the ratio of indebtedness to adjusted EBITDA, and the interest coverage ratio is the ratio of
adjusted EBITDA to cash interest expense. Adjusted EBITDA means (1) net income, adjusted to exclude the
cumulative effect of accounting changes and certain other exceptions; plus (2) the following items, to the extent
deducted from consolidated adjusted net income: (a) provision for taxes based on income or profits; (b) interest
expense, to the extent deducted in computing net income; (c) depreciation, amortization, goodwill impairment charges
and other non-cash expenses, subject to certain exceptions; plus (d) the amount of any minority interest expense
deducted in computing net income; plus (e) any non-cash compensation charge arising from any grant of stock, stock
options or other equity-based awards, to the extent deducted in computing net income; plus (f) certain non-cash income
(or loss) related to hedging activities, to the extent deducted in computing net income; minus (g) non-cash items
increasing such net income, subject to certain exceptions. The indentures governing the Company’s senior notes
contain similar covenants that in general are the same as or are no more restrictive than those contained in the senior
secured credit facilities.
In addition, certain of the Company’s debt agreements contain various covenants and restrictions specific to the
subsidiary that is the legal counterparty to the agreement. Under the Company’s long-term debt agreements,
acceleration of principal payments would occur upon payment default, violation of debt covenants not cured within 30
days or breach of certain other conditions set forth in the borrowing agreements. At December 31, 2006, the Company
was in compliance with all such covenants and restrictions.
Because of restrictions contained in the Merger Agreement with Alltel, Windstream may be limited in the amount of
stock that it can issue to make acquisitions or raise additional capital in the two year period ending July 17, 2008 (“the
restricted payment period”). These restrictions are intended to prevent Windstream from taking any actions that could
cause the spin-off from Alltel to be taxable to Alltel under Section 355(e) of the Internal Revenue Code or otherwise
jeopardize the tax-free status of the spin-off from Alltel or the Merger. In particular, during the restricted payment
period, Windstream is prohibited from entering into any agreement, understanding or arrangement or engaging in any
substantial negotiations with respect to any transaction involving the acquisition of Windstream stock or the issuance
of shares of Windstream’s stock, or options to acquire or other rights in respect of such stock, in excess of a permitted
basket of 71,130,989 shares (as adjusted for stock splits, stock dividends, recapitalizations, reclassifications and similar
transactions), unless, generally, the shares are issued to qualifying Windstream employees or retirement plans, each in
accordance with “safe harbors” under regulations issued by the IRS. Nevertheless, Windstream can take any of the
actions described above in the event that the IRS grants a favorable ruling to Alltel or Windstream as to the effect of
such action on the tax-free status of the spin-off or Merger.
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