CHICAGO--(BUSINESS WIRE)-- 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).
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
Rating Telecom Companies
John Culver, CFA
70 W. Madison Street,
Chicago, IL 60602
Brian Bertsch, +1-212-908-0549 (New York)
Source: Fitch Ratings