TEXT-Fitch affirms Level 3 Communications IDR at 'B'
Oct 4 - Fitch Ratings has affirmed the 'B' Issuer Default Ratings (IDRs) assigned to Level 3 Communications, Inc. (LVLT) and its wholly owned subsidiary Level 3 Financing, Inc. (Level 3 Financing). In addition, Fitch has affirmed specific issue and Recovery Ratings assigned to LVLT and Level 3 Financing as outlined below. The Rating Outlook remains Positive. LVLT had approximately $8.5 billion of debt outstanding on June 30, 2012. LVLT's ratings recognize, in part, the de-leveraging of the company's balance sheet resulting from its acquisition of Global Crossing Limited (GLBC). Pro forma for the acquisition and LVLT's senior note issuance, LVLT's leverage declines to 6.2 times (x) for the latest 12 month (LTM) period ended June 30, 2012, compared with the company's actual leverage of 6.5x as of June 30, 2012, and 8.1x as of Dec. 31, 2011. Moreover, based on the company's ability to realize anticipated operating cost synergies, the GLBC acquisition positions LVLT to further improve its credit profile and generate consistent levels of free cash flow. The acquisition accelerates LVLT's progress in achieving its target leverage ratio of 3.0x to 5.0x. The Positive Outlook reflects Fitch's belief that LVLT's credit profile will strengthen as the company achieves the cost synergies associated with the GLBC acquisition. Fitch anticipates that LVLT's credit protection metrics during 2012 will remain relatively consistent with year-end 2011 pro forma metrics as integration costs will largely offset positive operating momentum. Fitch expects LVLT's leverage as of year-end 2012 (on a pro forma basis) will dip below 6.2x. Fitch expects to observe the strengthening of LVLT's credit metrics during 2013 as cost synergies begin to take effect and integration costs begin to diminish. Fitch envisages LVLT leverage will decline below 5.5x by the end of 2013. Fitch believes that LVLT's liquidity position is adequate given the rating and is primarily supported by cash carried on its balance sheet, which as of June 30, 2012 totaled approximately $733 million (pro forma for LVLT's issuance of its 8.875% senior notes due 2019 cash balance is $1.026 billion). The company does not maintain a revolver and relies on capital market access to replenish cash reserves, which when combined with the lack of positive free cash flow generation limits the company's financial flexibility in Fitch's opinion. LVLT does not have any significant maturities scheduled during 2012 and Fitch believes LVLT's pro forma cash position is sufficient to address 2013 maturities which total approximately $172 million while funding anticipated free cash flow deficits during 2012. Considering the successful refinancing of Level 3 Financing's secured term loan due 2014 (announced by the company on Aug. 1, 2012), LVLT's next scheduled maturity is not until 2015 when approximately $775 million of debt is scheduled to mature. Fitch believes the incremental EBITDA captured through the GLBC acquisition along with realization of anticipated cost synergies and dwindling integration costs will position LVLT to generate consistent levels of free cash flow. Excluding $32 million of integration related costs, LVLT's free cash flow during the first half of 2012 was a deficit of $178 million. The company generated $3 million of positive free cash flow during the second quarter of 2012 and expects to be free cash flow positive for the remainder of 2012. Fitch expects LVLT to generate in excess of $100 million of free cash flow during 2013. Positive rating actions will likely occur as the company demonstrates that it is successfully integrating GLBC without material disruption to its operations. Equal consideration will be given to the company's ability to attain cost synergies while maintaining positive operational momentum. Evidence of positive operating momentum includes stable to expanding gross margins and revenue growth within the company Core Network Services segment. Fitch would expect LVLT to be generating consistent positive free cash flow and reduce leverage to 5.5x before taking a positive rating action. A stabilization of the Rating Outlook at the current rating level would coincide with LVLT experiencing difficulty or delay in fully integrating GLBC and achieving anticipated cost synergies. A weakening of LVLT's operating profile, as signaled by deteriorating margins and revenue erosion brought on by difficult economic conditions or competitive pressure will likely lead to negative rating action. Overall, Fitch's ratings incorporate LVLT's highly levered balance sheet, its weaker competitive position and lack of scale relative to larger and better capitalized market participants. The ratings for LVLT reflect the company's strong metropolitan network facilities position relative to alternative carriers, as well as the diversity of its customer base and service offering, and a relatively stable pricing environment for a significant portion of LVLT's service portfolio. Based largely on LVLT's strategy to invest in metropolitan facilities and carry more communications traffic on its network, the company derives strong operating leverage from its cost structure and network, enabling it to enhance margins and rapidly increase cash flows once revenue growth returns. Additionally, Fitch expects that the company can further strengthen its operating leverage as it continues to migrate its revenue mix to more margin rich data services and away from lower margin voice services. What Could Trigger a Positive Rating Action --Consolidated leverage reduces to 5.5x or lower; --Consistent generation of positive free cash flow; --Successful integration of GLBC without material disruption to its operations. What Could Trigger a Negative Rating Action --Difficulty or delay in fully integrating GLBC and achieving anticipated cost synergies; --Weakening of LVLT's operating profile, as signaled by deteriorating margins and revenue erosion brought on by difficult economic conditions or competitive pressure. Fitch has affirmed the following ratings with a Positive Outlook: LVLT: --IDR at 'B'; --Senior unsecured notes at 'B-/RR5'. Level 3 Financing, Inc.: --IDR at 'B'; --Senior secured term loan at 'BB/RR1'; --Senior unsecured notes at 'BB-/RR2'. Fitch has assigned the following rating with a Positive Outlook: Level 3 Financing, Inc.: --Senior Secured Tranche B-II Term Loan due 2019 'BB/RR1'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Rating Telecom Companies' (Aug. 9, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology Rating Telecom Companies
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