Fitch Rates CenturyLink's Senior Unsecured Notes Offering 'BB+'; Outlook
CHICAGO -- March 18, 2013
Fitch Ratings has assigned a 'BB+' rating to CenturyLink, Inc.'s (CenturyLink)
proposed offering of $500 million of senior unsecured notes due 2020. Proceeds
are expected to be used to reduce revolver borrowings, repay $176 million of
senior unsecured notes maturing on April 1, 2013 and for general corporate
purposes. CenturyLink's Issuer Default Rating (IDR) is 'BB+'. The Rating
Outlook is Stable.
KEY RATING DRIVERS
The following factors support the rating:
--Fitch's ratings are based on the expectation that CenturyLink will
demonstrate steady improvement in its revenue profile over the next couple of
--Free cash flows (FCFs) are expected to strengthen with a reduction in the
dividend, and liquidity is expected to remain relatively strong;
--Execution risks related to the integration of Qwest Communications
International, Inc. (Qwest) and Savvis, Inc. (Savvis) are nearly behind the
The following concerns are embedded in the rating:
--The company's recent change in financial policy, which incorporates the
maintenance of net leverage of up to 3.0x, less restrictive than its previous
--The decline of 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, the company initiated a $2 billion common stock repurchase
program, which while accompanied by a dividend reduction, will result in a
lower level of debt reduction over the next two years than previously
incorporated in Fitch's expectations. 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, leverage in 2012 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 net debt was $20.4 billion at Dec. 31, 2012. Financial
flexibility is provided through a $2 billion revolving credit facility, which
matures in April 2017. As of Dec. 31, 2012, approximately $1.18 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. Debt maturities in 2013 and
2014 are approximately $1.1 billion and $0.7 billion, respectively.
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.
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
--For QC or Embarq, leverage trends toward 2.5x or higher (based on external
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 Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Global Telecoms Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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John Culver, CFA
Fitch Ratings, Inc.
70 W. Madison Street,
Chicago, IL 60602
Brian Bertsch, +1-212-908-0549 (New York)
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