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TEXT-Fitch rates proposed CenturyLink offering 'BBB-'
October 1, 2012 / 8:11 PM / 5 years ago

TEXT-Fitch rates proposed CenturyLink offering 'BBB-'

Oct 1 () - Fitch Ratings has assigned a 'BBB-' rating to CenturyLink, Inc.'s
(CenturyLink) proposed offering of 10- and 30-year senior unsecured notes. Fitch
currently rates CenturyLink's Issuer Default Rating (IDR) 'BBB-'. The Rating
Outlook is Stable. 

Proceeds from the offering, along with available cash or additional borrowings 
under CenturyLink's credit facilities, will be used to fund a redemption of 
Qwest Corporation International Inc.'s (QCII) $550 million of outstanding 8% 
senior unsecured notes due 2015 and tender offer for QCII's $800 million of 
outstanding 7.125% senior unsecured notes due 2018 as well as pay related fees 
and expenses. Notes not tendered will be redeemed. Following the retirement of 
these debt issues there will no longer be any publicly outstanding debt at QCII.

Fitch's ratings for CenturyLink are based on the expectation that it will 
demonstrate steady improvement in its revenue profile over the next couple of 
years in combination with solid leverage for the rating category, strong free 
cash flows (FCFs) and strong liquidity. 

Fitch expects CenturyLink's revenue growth to return to a positive trend in late
2013. Revenues from high-speed data and certain advanced business services, 
including the managed hosting and cloud computing services offered by Savvis 
Inc. (Savvis), and a modest but growing level of revenues from facilities-based 
video, are expected to contribute to stability. There is some downside risk due 
to the weak economy, which could be partly offset by revenue synergies from the 
Savvis acquisition.

CenturyLink's FCF is expected to be relatively strong in the near term. Low cash
tax payments arising from bonus depreciation and the utilization of net 
operating losses of its subsidiaries, QCII and Savvis, contribute to FCF levels 
remaining strong. 

Fitch expects CenturyLink's gross debt to EBITDA to be in the 2.7x to 2.8x range
in 2012, partly due to premiums and expenses incurred to retire high coupon debt
and extend debt maturities. Leverage is on a path to decline as acquisition 
synergies are realized and debt is reduced. In Fitch's view, CenturyLink is on a
path to meet its commitment made following the Qwest acquisition to reduce gross
debt by $1.5 billion - $2 billion by the end of 2012. The reduction excludes the
$2 billion incurred to acquire Savvis. Net leverage for the last 12 months 
ending June 30, 2012, was 2.9x (excluding integration and merger-related costs 
and share-based compensation expenses).

The support provided by strong FCF and moderately declining leverage is balanced
against the decline of traditional voice revenues, primarily in the consumer 
sector, from wireless substitution and moderate levels of continuing cable 
telephony substitution. Fitch expects such declines to continue over time, 
although the effect will lessen in the long run, as their share in the total 
revenue base diminishes.

In Fitch's opinion, execution risk related to the integration of Qwest and 
Savvis has diminished given progress made since the acquisitions were closed 
more than a year ago. The company's estimates of anticipated operating cost 
synergies related to the Qwest integration approximate $650 million. Synergies 
are expected to be realized over a three- to five-year period. Operational risk 
is mitigated by management's experience in rationalizing previous large mergers,
such as Embarq, and the expectation that Savvis will operate as a separate 
business unit.

CenturyLink's total debt was $21.6 billion at June 30, 2012, and cash and 
equivalents amounted to approximately $281 million. Financial flexibility is 
provided through a $2 billion revolving credit facility, which matures in April 
2017. The facility was amended in April 2012 to increase its size from $1.7 
billion to $2 billion and to extend the maturity. As of June 30, 2012, $1.75 
billion was available on the facility. CenturyLink has a $160 million 
uncommitted revolving letter of credit facility. In total, CenturyLink had $123 
million in outstanding letters of credit as of June 30, 2012. 

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, Qwest
Communications International Inc. and Qwest Services Corporation (QSC). 

In 2012, Fitch expects CenturyLink's FCF (defined as cash flow from operations 
less capital spending and dividends) to range from $1.3 billion to $1.4 billion 
(prior to nonrecurring charges related to debt refinancings). Expected FCF 
levels reflect capital spending within the company's guidance range of $2.8 
billion to $2.9 billion. Within the capital budget, areas of focus for 
investment include continued fiber-to-the-tower initiatives, the expansion of 
data center capacity at Savvis, the continued build-out of fiber-to-the-node and
success-based spending on video.

Fitch believes CenturyLink has the financial flexibility to manage upcoming 
maturities due to its FCF and credit facilities. Remaining debt maturities in 
2012 are nominal and in 2013 are $1.1 billion. 

Going forward, Fitch expects CenturyLink and QC will be its only issuing 
entities. CenturyLink has a universal shelf registration available for the 
issuance of debt and equity securities, as well as a $1.5 billion authorized 
commercial paper program. The company effectively limits borrowing under the 
program to the amount available under the credit facility. There was no 
commercial paper outstanding as of June 30, 2012.

What Could Trigger a Rating Action:

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:

--The company falls short of expectations to return to positive revenue growth 
by the end of 2013 combined with leverage of 2.5x or below by the end of 2014.

--Its dividend payout ratio is not at 55% or less, a level Fitch believes is 
necessary to maintain financial flexibility. Fitch evaluates the payout ratio in
the context of spending on growth initiatives (e.g. fiber to the cell site and 
demand-driven data center expansion).

Contacts:

Primary Analyst

John Culver, CFA

Senior Director

+1-312-368-3216

Fitch, 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'. 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 andALL 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'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF
CONDUCT' SECTION OF THIS SITE. NORMAL RATINGS Fitch Rates Proposed CenturyLink
Offering 'BBB-' yes

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