The following is from Fitch Ratings on September 22:
Fitch Ratings has assigned a 'BBB-' rating to Qwest Corp.'s (QC) proposed offering of senior unsecured notes due 2054. QC is an indirect wholly owned subsidiary of CenturyLink, Inc. (CenturyLink). Net proceeds from the offering, combined with cash or borrowings from CenturyLink or one of its affiliates, will be used to repay QC's $600 million 7.5 percent notes maturing Oct. 1. QC's and CenturyLink's Issuer Default Rating (IDR) is 'BB+'. The Rating Outlook is Stable.
In connection with the refinancing, QC plans to borrow $100 million from unaffiliated lenders. Since the net proceeds from the loan will not be available until after Oct. 1, QC will use those proceeds to increase its available cash or repay inter-company loans.
KEY RATING DRIVERS
The following factors support QC's and CenturyLink's ratings:
--Fitch's ratings are based on the expectation that CenturyLink will demonstrate steady improvement in its revenue profile over the next couple of years;
--Near-term consolidated free cash flows (FCFs) have strengthened with the approximately 25 percent reduction in the dividend in early 2013, and liquidity is expected to remain relatively strong;
--QC's issue ratings are based on the relatively lower leverage of QC and its debt issues' senior position in the capital structure relative to CenturyLink's senior unsecured debt.
The following factors are embedded in QC's and CenturyLink's ratings:
--CenturyLink's financial policy, which incorporates the maintenance of net leverage of up to 3.0x;
--The decline of traditional voice revenues, primarily in the consumer sector, from wireless substitution and moderate levels of cable telephony substitution. Although such revenues are declining in the revenue mix and are being replaced by broadband and business services revenues, these latter sources have lower margins.
CenturyLink's consolidated revenues continue to show signs of reaching stability, having actually grown a modest 0.5 percent in the first half of 2014. With the company facing relatively nominal headwinds in the second half of the year, Fitch expects revenues to decline to less than 1 percent in 2014, after recording a 1.5 percent decline in 2013. Fitch continues to expect revenue growth from strategic areas, including high-speed data, advanced business services, as well as in managed hosting and cloud computing services offered by CenturyLink Technology Solutions, to contribute to longer- term revenue stability.
In May 2014, CenturyLink completed ahead of schedule a two-year, $2 billion common stock repurchase program initiated in February 2013. A follow-up 24-month, $1 billion repurchase program became effective upon the completion of the previous program and by the end of the second quarter, $45 million of shares were repurchased. CenturyLink expects to complete repurchases under the $1 billion program over an 18 - 24 month period.
On a gross debt basis, CenturyLink's leverage for the last 12 months ending June 30, was approximately 2.93x. Leverage has risen from the 2.84x posted in 2013 given slight pressure on EBITDA. Prior to this year, merger synergies offset much of the effect on EBITDA of the shift in service revenue to lower margin but strategic broadband and business service revenue from higher-margin legacy voice revenues. Fitch believes leverage will remain under 3.0x over the next several years, in part due to a stabilization of EBITDA in 2016, as newer strategic services achieve greater scale.
CenturyLink's total debt was $21.0 billion at June 30. Financial flexibility is provided through a $2 billion revolving credit facility, which matures in April 2017. As of June 30, approximately $1.16 billion was available on the facility. CenturyLink also has a $160 million uncommitted revolving letter of credit facility.
In 2014, Fitch expects CenturyLink's FCF (defined as cash flow from operations less capital spending and dividends) to range from $1.1 billion to $1.3 billion, similar to the approximately $1.2 billion for 2013. Expected FCF levels reflect capital spending within the company's guidance of approximately $3 billion for 2014. Within the capital budget, areas of focus for investment include continued spending on data center/hosting, broadband expansion and enhancement, as well as spending on IPTV, the company's facilities- based video program.
Fitch believes CenturyLink has the financial flexibility to manage upcoming maturities due to its FCF and credit facilities. Following the repayment of the $600 million senior unsecured notes to be partially funded by this offer, remaining maturities in 2014 are nominal. In 2015, maturities amount to approximately $0.5 billion.
The principal financial covenants in the $2 billion revolving credit facility limit CenturyLink's debt to EBITDA for the past four quarters to no more than 4.0x and EBITDA to interest plus preferred dividends (with the terms as defined in the agreement) to no less than 1.5x. QC has a maintenance covenant of 2.85x and an incurrence covenant of 2.35x. The facility is guaranteed by Embarq Corp., Qwest Communications International Inc., Qwest Services Corp. (QSC) and Savvis Inc. (d/b/a CenturyLink Technology Solutions) and its principal subsidiary.
Going forward, Fitch expects CenturyLink and QC will be CenturyLink's only issuing entities. CenturyLink has a universal shelf registration available for the issuance of debt and equity securities.
Fitch does not expect a positive rating action over the next several years based on its assessment of the competitive risks faced by CenturyLink and expectations for leverage.
A negative rating action could occur if:
--Consolidated leverage through, but not limited to, operational performance, acquisitions, or debt-funded stock repurchases, is expected to be 3.5x or higher; and
--For QC or Embarq, which are notched up from CTL, leverage trends toward 2.5x or higher (based on external debt).
Additional information is available at 'fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28,);
--'Rating Global Telecoms Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating European Telecoms Companies - Sector Credit Factors
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