Fitch Rates Level 3 Financing Secured Credit Facility 'BB/RR1'
CHICAGO -- August 13, 2013
Fitch Ratings has assigned a 'BB/RR1' rating to Level 3 Financing, Inc.'s $596
million senior secured tranche B 2020 term loan facility due January 2020.
Level 3 Financing is a wholly owned subsidiary of Level 3 Communications, Inc.
(LVLT). The Issuer Default Rating (IDR) for both LVLT and Level 3 Financing is
'B' with a Positive Rating Outlook. LVLT had approximately $8.5 billion of
debt outstanding on June 30, 2013.
Proceeds of the new term loan are expected to be used to refinance the
company's existing equivalent sized tranche B 2016 term loan facility due
February 2016. The terms of the new credit facility, including the security
and guaranty structure are expected to be substantially similar to the
existing Tranche B 2016 term loan. Outside of the extended maturity date and
an expected reduction of interest expense related to this transaction, LVLT's
credit profile has not substantially changed.
Fitch believes that 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, 2013 totaled approximately $596 million. The company does not maintain a
revolver and relies on capital market access to replenish cash reserves, which
limits the company's financial flexibility in Fitch's opinion. LVLT does not
have any significant maturities scheduled during the remainder of 2013 or into
2014. LVLT's next scheduled maturity is not until 2015 when approximately $775
million of debt is scheduled to mature or convert into equity.
KEY RATING DRIVERS
LVLT's ratings recognize, in part, the de-leveraging of the company's balance
sheet resulting from its acquisition of Global Crossing Limited (GLBC). LVLT's
leverage has declined to 5.4x as of the latest 12 months (LTM) period ended
June 30, 2013, which compares favorably with company's actual leverage of
5.85x as of Dec. 31, 2012 and 6.54x as of June 30, 2012.
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 expects to observe the strengthening of LVLT's credit
metrics during 2013 as cost synergies begin to take effect and integration
costs begin to diminish. Fitch foresees LVLT leverage will approach 5.2x by
the end of 2013 as the company continues its progress to achieving its 3x to
5x net leverage target.
Positive rating actions will likely occur as the company demonstrates that it
can consistently generate positive free cash flow and reduce leverage to 5.5x
or below. Equal consideration will be given to the company's ability to attain
cost synergies while maintaining positive operational momentum. Evidence of
positive operating momentum includes stable to expanding gross margins and
revenue growth within the company Core Network Services segment. Fitch
believes the incremental EBITDA captured through the GLBC acquisition along
with realization of anticipated cost synergies and dwindling integration costs
will position LVLT to generate consistent levels of free cash flow. The
company reported a $109 million free cash flow deficit during the LTM period
ended June 30, 2013. Fitch expects that LVLT will generate a nominal amount of
positive free cash flow during 2013.
A stabilization of the Rating Outlook at the current rating level would
coincide 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 difficult economic conditions or competitive pressure will likely lead to
negative rating action.
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 service portfolio.
What Could Trigger a Positive Rating Action:
--Consolidated leverage reduces to 5.5x or lower;
--Consistent generation of positive free cash flow;
--Successful integration of GLBC without material disruption to its
What Could Trigger a Negative Rating Action:
--Difficulty or delay in fully integrating GLBC and achieving anticipated cost
--Weakening of LVLT's operating profile, as signaled by deteriorating margins
and revenue erosion brought on by difficult economic conditions or competitive
Additional information is available at 'www.fitchratings.com'.
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 - Effective from 8 August 2012 - 5 August 2013
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Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Brian Bertsch, New York, +1 212-908-0549
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