N@N

Fitch Maintains CenturyLink's Ratings on Watch Negative

^{Published on 2010-10-13 10:20:28 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings is maintaining the Issuer Default Ratings (IDRs) of CenturyLink, Inc. (CenturyLink) (NYSE: CTL) and Embarq Corporation (Embarq) on Rating Watch Negative. Certain security ratings of Embarq and Embarq local telephone subsidiaries have been affirmed with a Stable Outlook. A full rating list is shown below.

This release pertains to Fitch's six-month review of the Rating Watch status following the placement of the company's ratings on Rating Watch Negative on April 22, 2010. CenturyLink and Qwest Communications International, Inc. (Qwest) have a pending agreement to merge in an all-stock transaction. Fitch expects to finalize CenturyLink's and Qwest's ratings following the receipt of its final regulatory approvals and prior to the close of the merger (anticipated for the first half of 2011).

In evaluating the final ratings, Fitch will take into account expectations for the merged company's future financial performance and the underlying operating environment as it affects the company's wireline-based business and the extent to which secular pressure on voice service revenues can be mitigated by proposed synergies, productivity improvements, and revenue from growth areas (primarily data services). Additional factors in evaluating the merger include the integration costs incorporated into the transaction and the outcome of the regulatory approval process. Pro forma net leverage for CenturyLink/Qwest for the last 12 months ending June 30, 2010, excluding synergies, was relatively strong at approximately 2.4 times (x). However, CenturyLink gained exposure to more intense competition through the 2009 acquisition of Embarq and its higher suburban/urban profile, and the acquisition of Qwest will add to the exposure to more intensely competitive markets and higher levels of technology substitution. As a result of the higher business risk, the combined CenturyLink/Qwest would have to demonstrate the ability to maintain leverage materially below Fitch's investment-grade rating threshold of 3.0x for a traditional rural local exchange carrier (RLEC) and, to sustain financial flexibility, its dividend payout as a percentage of free cash flow (FCF) would have to be no greater than 55%.

CenturyLink's current ratings are supported by its high EBITDA margins and strong cash flow before capital spending and dividends. Constraining factors in the ratings include the effects of the weak economy on operations, as well as competition from cable operators and wireless substitution. To augment its traditional voice and high-speed data services, the company has been reselling satellite-based video services. In August 2010, the company started to resell DirecTV's satellite-based video offering, replacing DISH Network. The company also has three markets where it has deployed wireline-based video alternatives, and it is in the preliminary stages of launching service in Las Vegas. Another four markets are expected to be launched by mid-2011.

Fitch notes that CenturyLink has taken, or plans to take, actions in 2010 to support its credit profile in the intermediate term. CenturyLink plans to use FCF and a nominal amount of borrowings on its credit facility to repay $482 million of debt maturing in October 2010, with the reduced interest expense benefiting the company in 2011. In addition, the company made a $300 million (pretax) contribution to its pension plan in the first quarter of 2010, and on a preliminary basis expects its minimum required funding amount to be $37 million for 2011.

CenturyLink's total debt was $7.675 billion at June 30, 2010, and cash and equivalents amounted to approximately $186 million. Financial flexibility is provided through two revolving credit facilities: a $728 million facility that matures in December 2011 at CenturyLink, which had approximately $223 million outstanding on June 30, 2010, and an $800 million undrawn facility due in May 2011 at Embarq. The principal financial covenants in CenturyLink's facility limit 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. The primary financial covenant in the Embarq facility limits leverage to 3.25x. Prior to the maturity of the Embarq facility in 2011, CenturyLink anticipates securing a single larger credit facility.

Fitch believes CenturyLink has the financial flexibility to manage upcoming maturities due to its FCF and credit facilities. On Oct. 15, 2010, approximately $483 million of CenturyLink's $500 million in 2010 debt maturities is due and is expected to be retired from FCF and a modest level of borrowing on the revolver. In 2011, debt maturities total $235 million (including the $223 million on CenturyLink's credit facility), in 2012 a total of $328 million matures, and in 2013 $818 million matures. CenturyLink also 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 two credit facilities.

Fitch expects FCF in 2010 to range from $500 million to $550 million after dividends, capital spending, and the after-tax effect of the $300 million contribution to the pension plan. Dividends have increased moderately, given the 3.6% increase in dividend per share announced in February 2010. In 2010, the company's capital expenditures are expected to range from $825 million to $875 million, approximately 15% lower (using the midpoint) than the $1 billion spent on a pro forma basis in 2009.

The CenturyLink ratings maintained on Rating Watch Negative are as follows:

CenturyLink

--Long-Term Issuer Default Rating (IDR) 'BBB-';

--Senior Unsecured revolving credit facility 'BBB-';

--Senior Unsecured debt 'BBB-';

--Short-Term IDR 'F3';

--Commercial paper 'F3'.

Embarq

--Long-Term Issuer Default Rating (IDR) 'BBB-'.

Carolina Telephone & Telegraph (CT&T)

--IDR 'BBB-'.

Embarq - Florida, Inc. (EFL)

--IDR 'BBB-'.

In addition, ratings affirmed with a Stable Outlook are as follows:

Embarq

--Sr. unsecured notes 'BBB-';

--Senior unsecured revolving credit facility 'BBB-'.

Carolina Telephone & Telegraph (CT&T)

--Debentures 'BBB-'.

Embarq - Florida, Inc. (EFL)

--First mortgage bonds 'BBB'.

Additional information is available at [ www.fitchratings.com ]

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 16, 2010);

--'Rating Global Telecoms Companies' (Sept. 16, 2010).

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE [ WWW.FITCHRATINGS.COM ]. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.