(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
Proceeds are expected to be used to partially repay $750 million
unsecured notes maturing on June 15, 2013. QC is an indirect
subsidiary of CenturyLink, Inc. (CenturyLink). QC's and
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
steady improvement in its revenue profile over the next couple
--Consolidated free cash flows (FCFs) are expected to strengthen
reduction in the dividend, and liquidity is expected to remain
--CenturyLink's execution risks related to the integration of
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
The following concerns are embedded in QC's and CenturyLink's
--CenturyLink's recent change in financial policy, which
maintenance of net leverage of up to 3.0x, less restrictive than
--The decline of CenturyLink's traditional voice revenues,
primarily in the
consumer sector, from wireless substitution and moderate levels
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
services, including the managed hosting and cloud computing
services offered by
Savvis and a modest but growing level of revenues from
are expected to contribute to stability.
In February 2013, CenturyLink initiated a $2 billion common
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
shareholders will increase.
On a gross debt basis, CenturyLink's leverage for the last 12
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.
flexibility is provided through a $2 billion revolving credit
matures in April 2017. As of March 31, 2013, approximately
$1.925 billion was
available on the facility. CenturyLink also has a $160 million
revolving letter of credit facility.
The principal financial covenants in the $2 billion revolving
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
guaranteed by Embarq, Qwest Communications International Inc.
and Qwest Services
In 2013, Fitch expects CenturyLink's FCF (defined as cash flow
less capital spending and dividends) to range from $1 billion to
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
center/hosting, broadband expansion and enhancement, as well as
IPTV, the company's facilities based video program.
Fitch believes CenturyLink has the financial flexibility to
maturities due to its FCF and credit facilities. Long-term debt
remaining in 2013 and 2014 are approximately $0.9 billion and
respectively. The remaining 2013 maturities reflect the
repayment of a $176
million CenturyLink maturity on April 1, 2013 but are before the
June QC maturity to be partly repaid by the proceeds of this
Going forward, Fitch expects CenturyLink and QC will be
issuing entities. CenturyLink has a universal shelf registration
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
A negative rating action could occur if:
--Consolidated leverage through, but not limited to, operational
acquisitions, or debt-funded stock repurchases, is expected to
be 3.5x or
--For QC or Embarq, leverage trends toward 2.5x or higher (based
John Culver, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
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
Rating Telecom Companies
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