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Fitch Rates Proposed Qwest Corporation Offering 'BBB-'

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^{Published in Science and Technology on Tuesday, May 31st 2011 at 11:26 GMT by Market Wire}  

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has assigned a 'BBB-' rating to Qwest Corporation's (QC) proposed offering of retail notes. Proceeds from the offering, combined with any necessary borrowings from QC's ultimate parent CenturyLink, Inc. (CenturyLink) (NYSE: CTL), will be used to redeem QC's $825 million 7.875% notes prior to their maturity on Sept. 1, 2011. On March 31, 2011, QC had approximately $8 billion in long-term debt outstanding. QC's and CenturyLink's IDRs are both 'BBB-' and the Outlook for all ratings is Stable.

Fitch's ratings for QC and CenturyLink are based on the expectations that CenturyLink will demonstrate a very gradual improvement in its revenue profile in combination with solid leverage for the rating category, strong free cash flow (FCF) and strong liquidity. Low cash tax payments arising from bonus depreciation and recently acquired Qwest Communications International Inc.'s (Qwest) net operating losses contribute to FCF levels remaining strong while the company incurs front-end-loaded integration costs. In addition, CenturyLink's acquisition of Savvis, Inc. (Savvis), when completed, will strengthen the company's revenue growth profile. 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 rationalizing previous mergers.

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 stabilize in the 2013-2014 timeframe (or earlier if revenue synergies are achieved), about a year earlier than 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 $19.8 billion at March 31, 2011, and cash and equivalents amounted to approximately $694 million. Financial flexibility is provided through a $1.7 billion revolving credit facility, which matures in January 2015. The principal financial covenants in the 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 and Qwest Services Corporation (QSC).

Fitch believes CenturyLink has the financial flexibility to manage upcoming maturities due to its FCF and credit facilities. For the remainder of 2011, the only long-term debt maturing consists of the $825 QC maturity being redeemed by this offering. 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 QC, 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 March 31, 2011.

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:
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
Rating Global Telecoms Companies - Sector Credit Factors
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205 ]

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