Fitch Rates Qwest Corporation's Proposed Senior Unsecured Notes Offering 'BBB-'

Tue May 14, 2013 2:13pm EDT

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(The following statement was released by the rating agency) CHICAGO, May 14 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Qwest Corporation's (QC) proposed offering of senior unsecured notes due 2053. Proceeds are expected to be used to partially repay $750 million of senior unsecured notes maturing on June 15, 2013. QC is an indirect wholly owned subsidiary of CenturyLink, Inc. (CenturyLink). QC's and CenturyLink's Issuer Default Rating (IDR) is 'BB+'. The Rating Outlook is Stable. 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; --Consolidated free cash flows (FCFs) are expected to strengthen with a reduction in the dividend, and liquidity is expected to remain relatively strong; --CenturyLink's execution risks related to the integration of Qwest Communications International, Inc. (Qwest) and Savvis, Inc. (Savvis) are nearly behind the company; --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. The following concerns are embedded in QC's and CenturyLink's ratings: --CenturyLink's recent change in financial policy, which incorporates the maintenance of net leverage of up to 3.0x, less restrictive than its previous mid-2x target; --The decline of CenturyLink's 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. Fitch expects CenturyLink's revenues to decline slightly in 2013, and reach stability in 2014. Revenues from high-speed data and certain advanced business services, including the managed hosting and cloud computing services offered by Savvis and a modest but growing level of revenues from facilities-based video, are expected to contribute to stability. In February 2013, CenturyLink initiated a $2 billion common stock repurchase program, accompanied by a dividend reduction. The company plans to repurchase $2 billion in common stock by February 2015, primarily funded from FCF. Annual FCF improves by approximately $450 million as a result of a reduction in the common stock dividend of approximately 25%, but on a net basis, cash returned to shareholders will increase. On a gross debt basis, CenturyLink's leverage for the last 12 months ending March 31, 2013 was approximately 2.7x, consistent with the 2.7x to 2.8x range Fitch expects over the next several years. Debt reduction in 2013 and 2014 is expected to be modest. Additionally, there will be some pressure on EBITDA as there are lower incremental merger-related cost savings in 2013 than in 2012. CenturyLink's total debt was $20.8 billion at March 31, 2013. Financial flexibility is provided through a $2 billion revolving credit facility, which matures in April 2017. As of March 31, 2013, approximately $1.925 billion was available on the facility. CenturyLink also has a $160 million uncommitted revolving letter of credit facility. 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. Qwest Corporation (QC) has a maintenance covenant of 2.85x and an incurrence covenant of 2.35x. The facility is guaranteed by Embarq, Qwest Communications International Inc. and Qwest Services Corporation (QSC). In 2013, Fitch expects CenturyLink's FCF (defined as cash flow from operations less capital spending and dividends) to range from $1 billion to $1.3 billion. Expected FCF levels reflect capital spending within the company's guidance range of $2.8 billion to $3 billion. Within the capital budget, areas of focus for investment primarily include continued spending on fiber-to-the-tower, 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. Long-term debt maturities remaining in 2013 and 2014 are approximately $0.9 billion and $0.7 billion, respectively. The remaining 2013 maturities reflect the repayment of a $176 million CenturyLink maturity on April 1, 2013 but are before the $750 million June QC maturity to be partly repaid by the proceeds of this offering. 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. RATING SENSITIVITIES: 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, leverage trends toward 2.5x or higher (based on external debt). Contact: Primary Analyst John Culver, CFA Senior Director +1-312-368-3216 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst David Peterson Senior Director +1-312-368-3177 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Rating Telecoms Companies' (Aug. 9, 2012). Applicable Criteria and Related Research Corporate Rating Methodology here Rating Telecom Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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