CHICAGO–(BUSINESS WIRE)–Fitch Ratings has assigned a ‘BBB-‘ rating to Qwest Corporation’s (QC)
offering of senior unsecured notes due 2056. QC is an indirect wholly
owned subsidiary of CenturyLink, Inc. (CenturyLink). Net proceeds from
the offering, plus cash on hand, primarily will be used to retire at
maturity QC’s $235 million 8.375% notes due 2016. QC’s and CenturyLink’s
Issuer Default Rating (IDR) is ‘BB+’ and the Rating Outlook is Stable.
KEY RATING DRIVERS
The following factors support QC’s and CenturyLink’s ratings:
–Fitch’s ratings are based on the modestly revised expectation that
CenturyLink will demonstrate improvement in its revenue profile in the
latter part of 2016 (rather than for the full year). Fitch estimates
revenues declined just under 1% in 2015;
–Near-term consolidated free cash flows (FCFs) have strengthened and
were relatively healthy in 2015;
–Liquidity is expected to remain relatively strong over the rating
–QC’s issue ratings are based on the relatively lower leverage of QC
and its debt issues’ senior position in the capital structure relative
to CenturyLink’s senior unsecured debt.
The following factors are embedded in QC’s and CenturyLink’s ratings:
–CenturyLink’s financial policy, which incorporates a net leverage
target of up to 3.0x;
–High-margin voice revenues continue to decline but are largely being
replaced by broadband and business services revenues. The latter sources
have lower margins.
In May 2014, a 24-month, $1 billion share repurchase program became
effective and during the first nine months of 2015, $523 million of
shares were repurchased. The company completed its 2014 share repurchase
program in December 2015. Share repurchases are being funded primarily
out of FCF. Fitch does not expect CenturyLink to issue debt for future
On a gross debt basis, CenturyLink’s leverage for the latest 12 months
(LTM) ended Sept. 30, 2015 was approximately 3.03x. Leverage has risen
from the 2.84x and 2.95x posted in 2013 and 2014, respectively, given
slight pressure on EBITDA from lower revenue generation in early 2015
and as service revenues continue to shift to lower margin but strategic
broadband and business service revenue from higher-margin legacy voice
revenues. Fitch believes leverage will remain around 3.0x over the next
couple of years, in part due to a stabilization of EBITDA in 2016 or
2017, as newer strategic services achieve greater scale. QC’s leverage
totalled 2.13x for the LTM ended Sept. 30, 2015.
In 2015, Fitch estimates CenturyLink’s FCF (defined as cash flow from
operations less capital spending and dividends) was substantially
similar to the $913 million generated in 2014. Expected FCF levels
reflect capital spending within the company’s guidance of approximately
$2.8 billion for 2015 (lowered after the second quarter 2015 earnings
from approximately $3 billion). FCF is expected to decline in 2016
mainly due to higher cash taxes following the anticipated depletion of
federal NOLs by the end of 2015, partly offset by the extension of bonus
depreciation. Within the capital budget, areas of focus for investment
include continued spending on data center/hosting, broadband expansion
and enhancement, as well as spending on IPTV, the company’s
facilities-based video program.
–Fitch assumes revenues were down less than 1% in 2015, and will grow
in the very low single digits beginning in 2016. EBITDA margins in 2015
and 2016 are expected to decline slightly from the 38.8% recorded in
2014 as higher margin legacy revenues continue to decline.
–In 2015, Fitch estimates consolidated capital spending approximated
$2.8 billion, down from approximately $3 billion spent in 2014. The
company is anticipated to continue funding share repurchases with FCF in
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 higher.
–A reduction in capital spending that, in Fitch’s evaluation, affects
future revenue growth.
–For QC or Embarq, which are notched up from CTL, leverage trends
toward 2.5x or higher (based on external debt).
CenturyLink’s total debt was $20.4 billion at Sept. 30, 2015. Financial
flexibility is provided through a $2 billion revolving credit facility,
which matures in December 2019. As of Sept. 30, 2015, there were no
borrowings outstanding on the facility. CenturyLink also has a $160
million uncommitted revolving letter of credit facility.
Fitch believes CenturyLink has the financial flexibility to manage
upcoming maturities due to its FCF and credit facilities. Pro forma for
the QC refinancing, approximately $1.2 billion of debt matures in 2016.
In 2017, maturities amount to approximately $1.5 billion.
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 certain material subsidiaries of
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.
Date of Relevant Rating Committee: March 27, 2015.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology – Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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John Culver, CFA
Fitch Ratings, Inc.
Chicago, IL 60602
Alyssa Castelli, +1 212-908-0540