Science & Technology
Fitch Affirms CenturyLink's Ratings on Proposed Savvis Acquisition; Outlook Stable
CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of CenturyLink, Inc. (CenturyLink) (NYSE: CTL) at 'BBB-'; the Outlook remains Stable. Related ratings were also affirmed and a full list is shown below.
The affirmation follows the announcement by CenturyLink and Savvis, Inc. (Savvis) of a definitive agreement whereby CenturyLink will acquire Savvis in a cash and stock transaction valued at approximately $3.2 billion, including approximately $700 million of net debt.
Of the approximately $2.5 billion purchase price, 75% will be in the form of cash and 25% in CenturyLink common shares. Savvis' outstanding debt will be refinanced at the close of the transaction, and CenturyLink will assume Savvis' existing leases. CenturyLink has a $2 billion bridge facility in support of the cash requirements of the transaction, as well as full availability on its $1.7 billion revolving credit facility. Fitch expects CenturyLink to enter the long-term markets to finance the cash portion of the transaction. Synergies, at $70 million, are relatively nominal, and similar to integration costs to be incurred. The Savvis management team will continue on with CenturyLink and exist as a separate business.
The affirmation is based on the expectations that the transaction will modestly accelerate the previously expected very gradual improvement in CenturyLink's revenue profile. Based on Fitch's expectations that CenturyLink's pace of debt reduction following the merger with Qwest Communications International, Inc. (Qwest) will remain in place, leverage should remain relatively solid for the rating category; in addition, the company should maintain strong free cash flows (FCF) and strong liquidity. These supporting factors are balanced against the decline of traditional voice and long distance revenues, primarily in the consumer sector, from wireless substitution and moderate levels of continuing cable telephony substitution. In addition, execution risk is present with regard to the integration of Qwest and Savvis, with the risk mitigated by management's experience in this area.
Fitch expects CenturyLink's gross debt/EBITDA to approximate 2.5 times (x) or less in 2012 (prior to any synergies from Savvis), the first full year after the close of the Savvis transaction, and gradually decline thereafter as debt is reduced. Fitch notes that as a result of the pressures in the landline business, in order to maintain the current rating level, CenturyLink will need to maintain leverage at a level of 2.5x or below and its revenue profile will have to remain on a path toward a return to growth. In addition, Fitch believes CenturyLink will need to display a dividend payout of 55% or less in order to maintain financial flexibility. Fitch will evaluate the payout in the context of spending on growth initiatives.
As a result of the Savvis acquisition, Fitch now expects CenturyLink's revenue to reach a level of stability in the 2013-2014 timeframe (or earlier if revenue synergies are achieved), about a year earlier than the 2014-2015 timeframe previously expected. Contributing to stability are the continued growth of high-speed data and certain advanced business services. Fitch expects a modest but growing level of revenues from facilities-based video to contribute stability to the consumer revenue base. In the aggregate, Fitch expects revenue declines to be in the low single digits by 2012, as the most exposed revenue stream - consumer voice - is declining in importance. Fitch will re-evaluate the Rating Outlook if revenues are not making progress toward stability.
Pro forma for Qwest, CenturyLink's total debt was $19.3 billion at Dec. 31, 2010, and cash and equivalents amounted to approximately $545 million. Financial flexibility will be provided through a $1.7 billion revolving credit facility, which matures in January 2015. 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. Qwest Corporation has a maintenance covenant of 2.85x and an incurrence covenant of 2.35x. The new facility is guaranteed by Embarq, Qwest and Qwest Services Corporation (QSC).
Fitch believes pro forma CenturyLink has the financial flexibility to manage upcoming maturities due to its FCF and credit facilities. For the remainder of 2011, debt maturities total $825 million (excluding the $280 million on CenturyLink's credit facility as of Feb. 28, 2011), in 2012 a total of $1.8 billion matures, and in 2013 nearly $1.5 billion matures. Going forward, Fitch expects CenturyLink to refinance debt at Qwest Corporation, and to issue debt at the CenturyLink level. 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 Dec. 31, 2010.
Fitch affirms the following ratings with a Stable Outlook:
CenturyLink
--Long-Term IDR at 'BBB-';
--Senior unsecured $1.7 billion revolving credit facility at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Short-Term IDR at 'F3';
--Commercial paper at 'F3'.
Embarq Corp.
--Long-Term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.
Carolina Telephone & Telegraph (CT&T)
--IDR at 'BBB-';
--Debentures at 'BBB-'.
Embarq Florida, Inc. (EFL)
--IDR at BBB-';
--First mortgage bonds at 'BBB'.
Qwest Communications International, Inc.
--IDR at 'BBB-';
--Senior unsecured notes (guaranteed by QSC) at 'BBB-'.
Qwest Corporation
--IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.
Qwest Services Corporation
--IDR at 'BBB-'.
Qwest Capital Funding
--IDR at 'BBB-';
--Senior unsecured notes at '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).
Applicable Criteria and Related Research:
Rating Global Telecoms Companies - Sector Credit Factors
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
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