(The following statement was released by the rating agency.)
CHICAGO, October 04 (Fitch) Fitch Ratings has upgraded the Issuer Default
(IDR) assigned to Level 3 Communications, Inc. (LVLT) and its wholly owned
subsidiary Level 3 Financing, Inc. to 'B' from 'B-'. In addition, Fitch has
upgraded the ratings assigned to the various debt securities issued by LVLT and
Level 3 Financing by one notch as summarized at the end of this release. Fitch
has assigned a 'BB-/RR2' rating to the 8.125% senior unsecured notes due 2019
assumed by Level 3 Financing. Fitch has removed LVLT's ratings from Rating
Watch Positive and has assigned a Positive Rating Outlook for all of LVLT's
ratings. Approximately $7.2 billion of debt as of June 30, 2011 is affected by
The rating actions follow LVLT's announcement that the company closed on its
previously announced agreement to acquire Global Crossing Limited (GLBC) in a
tax free, stock for stock transaction.
The upgrade of LVLT's ratings recognizes, in part, the de-leveraging of the
company's balance sheet resulting from its acquisition of GLBC. Pro forma for
the acquisition, LVLT's leverage declines to 6.5 times (x) for the latest 12
month (LTM) period ended June 30, 2011 compared with the company's actual
leverage of 8.1x as of June 30, 2011 and 7.5x as of Dec. 31, 2010. 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 transaction accelerates
progress in achieving its target leverage ratio of 3.0x to 5.0x.
The Positive Rating 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 metrics as
integration costs will largely offset positive operating momentum. Fitch
expects LVLT's leverage as of year end 2011 (on a pro forma basis) will
approximate 6.2x and dip below 6.2x as of year end 2012. Fitch expects to
observe the strengthening of LVLT's credit metrics during 2013 as cost
begin to take effect.
From Fitch's perspective the GLBC acquisition strengthens LVLT's competitive
position. In addition to increasing LVLT's scale, the acquisition enhances the
breadth and depth of LVLT's service offering and permits the company to expand
into new markets. Importantly, the acquisition broadens the spectrum of
customers LVLT serves including large multi-national enterprise customers.
GLBC's network complements LVLT's existing network and the combined network
positions LVLT as a global network operator enabling the company to expand
existing customer relationships and capture new customer opportunities.
Achievement of expected cost synergies is reasonable from Fitch's viewpoint.
LVLT anticipates the transaction will yield annualized cost synergies of
approximately $340 million including annualized capital expenditure reduction
$40 million. Over 50% of the expected cost synergies are coming from network
expense and capital expense savings. Fitch anticipates that network cost
synergies will be realized as GLBC network traffic is migrated to LVLT's
and the company leverages the collective 'on-net' footprint to reduce
third-party network access costs. Additional cost synergies will be realized
LVLT rationalizes its combined network and eliminates duplicate circuits. LVLT
expects to achieve two-thirds of the run rate cost synergies within 18 months
the closing of the transaction. The cost of synergies is expected to range
between $200 million and $225 million, and half of the costs will be spent
during the first year following the close of the transaction.
Fitch believes LVLT's ability to manage the integration process and limit the
disruption to the company's overall operations is key to the success of the
transaction. The integration of the networks is primarily focused on long haul
assets. LVLT has a successful history of integrating long haul assets with the
company's acquisition of Genuity, WilTel and the long haul portion of the
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, 2011
totaled approximately $584 million. The company does not maintain a revolver
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. However, after considering the
effects of the GLBC acquisition, LVLT's cash balance should increase to over
$1.1 billion (calculation includes LVLT and GLBC cash as of June 30 as well as
net cash generated from financing activities related to the close of the GLBC
acquisition) as of June 30, 2011 on a pro forma basis. Fitch believes LVLT's
cash position is sufficient to address scheduled maturities during 2012 and
(totaling $566 million) while funding anticipated free cash flow deficits.
LVLT's next significant maturity tower is in 2014 when approximately $2.5
billion ($3.2 billion pro forma for the transaction) of debt is scheduled to
Positive rating actions will likely occur as the company demonstrates that it
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
operating momentum includes stable to expanding gross margins and revenue
within the company Core Network Services segment. Fitch would expect LVLT to
generating consistent positive free cash flow and reduce leverage to 5.5x
taking a positive rating action.
A stabilization of the Rating Outlook at the current rating level would
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
economic conditions or competitive pressure will likely lead to negative rating
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
Based largely on LVLT's strategy to invest in metropolitan facilities and carry
more communications traffic on its network, the company derives strong
leverage from its cost structure and network, enabling it to enhance margins
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.
Fitch has upgraded the following ratings with a Positive Outlook:
--IDR to 'B' from 'B-';
--Senior unsecured notes to 'B-/RR5 from 'CCC/RR5'.
Level 3 Financing, Inc.:
--IDR to 'B' from 'B-';
--Senior secured term loan to 'BB/RR1' from 'BB-/RR1';
--Senior unsecured notes to 'BB-/RR2' from 'B+/RR2'.
Fitch has assigned the following ratings with a Positive Outlook:
Level 3 Financing, Inc.:
--Senior unsecured notes due 2019 'BB-/RR2'.
70 W. Madison Street
Chicago, IL 60602
(New York Ratings team)
Reuters messaging: harold.barnett.thomsonreuters.net; Tel: +1-646-223-4186))