Fitch Rates CenturyLink's Proposed Senior Unsecured Notes Offering 'BB+'
CHICAGO -- November 14, 2013
Fitch Ratings has assigned a 'BB+' rating to CenturyLink, Inc.'s (CenturyLink)
proposed offering of senior unsecured notes due 2023. Proceeds, along with
cash on hand and revolver borrowings, are expected to be used to repay $800
million of senior unsecured notes maturing in 2018 issued by Qwest
Communications International, Inc. (QCII). CenturyLink has launched a
concurrent tender offer for any and all 2018 QCII notes. QCII is a wholly
owned subsidiary of CenturyLink. CenturyLink's Issuer Default Rating (IDR) is
'BB+'. The Rating Outlook is Stable.
KEY RATING DRIVERS
The following factors support CenturyLink's ratings:
--Fitch's ratings are based on the expectation that CenturyLink will
demonstrate steady improvement in its revenue profile over the next couple of
--Consolidated free cash flows (FCFs) are expected to strengthen with a
reduction in the dividend, and liquidity is expected to remain relatively
--CenturyLink's execution risks related to the integration of Qwest
Communications International, Inc. (Qwest) and Savvis, Inc. (Savvis) are
nearly behind the company.
The following concerns are embedded in CenturyLink's ratings:
--CenturyLink's change in financial policy in early 2013, which incorporates
the maintenance of net leverage of up to 3.0x, less restrictive than its
previous mid-2x target;
--The decline of CenturyLink's 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 consolidated revenues to continue to show lower
rates of decline in 2013 and 2014. Revenues are slow in returning to stability
due to lower rates of growth than previously expected in certain strategic
areas, including high-speed data, advanced business services, as well as the
managed hosting, and cloud computing services offered by Savvis Inc. In the
longer term, revenue growth from these services is expected to contribute to
In February 2013, CenturyLink initiated a $2 billion common stock repurchase
program, accompanied by a dividend reduction. 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, CenturyLink's leverage for the last 12 months ending
Sept. 30, 2013 was approximately 2.8x, 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 debt was $20.6 billion at Sept. 30, 2013. Financial
flexibility is provided through a $2 billion revolving credit facility, which
matures in April 2017. As of Sept. 30, 2013, approximately $1.8 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 of
approximately $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. Long-term debt maturities
remaining in 2013 are nominal. In 2014, approximately $0.7 billion matures.
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'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'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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John Culver, CFA, +1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
David Peterson, +1-312-368-3177
Michael Weaver, +1-312-368-3156
Brian Bertsch, +1-212-908-0549 (New York)
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