June 14 - Fitch Ratings has assigned a 'BBB-' rating to Qwest Corporation's
(QC) proposed offering of 40-year senior unsecured notes. QC is an
indirect wholly-owned subsidiary of CenturyLink, Inc. (CenturyLink).
Fitch's Issuer Default Rating (IDR) on CenturyLink is 'BBB-' and the Outlook for
all ratings is Stable.
Proceeds from the offering, along with available cash or additional borrowings
under CenturyLink's credit facilities, will be used to redeem all of QC's $484
million of outstanding 7.50% senior unsecured notes due 2023 as well as pay
related fees and expenses.
Fitch's ratings for QC and CenturyLink are based on the expectations that the
company will demonstrate a very gradual improvement in its revenue profile over
the next several years in combination with solid leverage for the rating
category, strong free cash flows (FCFs) and strong liquidity.
Fitch expects CenturyLink's revenue to stabilize in 2013-2014. 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, Qwest Communications International Inc.
(Qwest), and Savvis contribute to FCF levels remaining strong.
Fitch expects CenturyLink's gross debt to EBITDA to be approximately 2.7x in
2012, slightly higher than the 2.5x previously expected, but 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 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 March 31, 2012, pro forma for Savvis, was 2.76x
(excluding integration and merger-related costs and share-based compensation
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 is present with the integration of Qwest and
Savvis but manageable.
The company increased its estimate of anticipated operating cost synergies
related to the Qwest integration to approximately $650 million from $575
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.
In Fitch's view, as a result of the pressures in the landline business,
CenturyLink will need to sustain leverage at a level of 2.5x or below, and its
revenue profile will have to remain on a path toward a return to growth to
maintain the current rating level. Fitch will evaluate the progress of revenue
in strategic growth areas in light of the potential drag on improvements due to
the weak economy. Fitch believes CenturyLink will need to display a dividend
payout of 55% or less to maintain financial flexibility, but will evaluate the
payout in the context of spending on growth initiatives (e.g.
fiber-to-the-cell-site and demand-driven data center expansion).
CenturyLink's total debt was $22.9 billion at March 31, 2012, and cash and
equivalents amounted to approximately $1.5 billion. 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. Pro forma for the increase in
size, as of March 31, 2012, $2 billion was available on the facility, and there
were no letters of credit outstanding against the facility. CenturyLink has a
$160 million uncommitted revolving letter of credit facility. In total,
CenturyLink had $129 million in outstanding letters of credit as of March 31,
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 $2.7
billion to $2.9 billion, which includes $100 million of integration capital
spending. 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. Debt and capital lease
maturities in 2012 and 2013 are $480 million and $1.2 billion, respectively.
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 March 31, 2012.
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