Fitch Affirms CenturyLink's IDR at 'BB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of CenturyLink, Inc. (CenturyLink) and its subsidiaries at 'BB+'. The issue ratings of CenturyLink's $7.8 billion of outstanding senior unsecured notes and the rating of its revolving credit facility have been affirmed at 'BB+'. The outstanding $10.1 billion aggregate amount of senior unsecured debt of Qwest Corporation (QC) and Embarq Corporation (Embarq) have been affirmed at 'BBB-'. A full list of rating actions follows at the end of this release. The Rating Outlook is Stable.

KEY RATING DRIVERS

The following factors support CenturyLink's ratings:

--Fitch's ratings are based on the expectation that CenturyLink will demonstrate steady improvement in its revenue profile over the next couple of years;

--Consolidated free cash flows (FCFs) have strengthened with a reduction in the dividend, and liquidity is expected to remain relatively strong;

The following factors are embedded in CenturyLink's ratings:

--CenturyLink's financial policy, which incorporates the maintenance of net leverage of up to 3.0x;

--The decline of CenturyLink's traditional voice revenues, primarily in the consumer sector, from wireless substitution and moderate levels of cable telephony substitution. Although such revenues are declining in the revenue mix and are being replaced by broadband and business services revenues, these latter sources have lower margins.

Fitch estimates CenturyLink's consolidated revenues continued to show lower rates of decline in 2013 and expects the decline to further moderate to less than 1% in 2014. Revenues are slow in returning to stability due to lower rates of growth than previously expected in certain strategic areas, including high-speed data, advanced business services, as well as in managed hosting and cloud computing services offered by Century Technology Solutions. Fitch continues to expect revenue growth from these services to contribute to longer-term revenue stability.

In February 2013, CenturyLink initiated a two-year, $2 billion common stock repurchase program, accompanied by a dividend reduction. The repurchase program is expected to be primarily funded from FCF. At the current pace of repurchases, Fitch expects the program to be completed by mid-2014. The 25% reduction in 2013 in the common dividend improves annual FCF by approximately $450 million, but on a net basis, cash returned to shareholders has increased.

On a gross debt basis, CenturyLink's leverage for the last 12 months ending Sept. 30, 2013 was approximately 2.75x, consistent with the 2.7x to 2.8x range Fitch expects over the next several years. Fitch expects some modest debt reduction to stay within these metrics, as there will be some pressure on EBITDA given newer revenue sources have lower margins than legacy voice services.

CenturyLink's total debt was $20.6 billion at Sept. 30, 2013. Financial flexibility is provided through a $2 billion revolving credit facility, which matures in April 2017. As of Sept. 30, 2013, approximately $1.8 billion was available on the facility. CenturyLink also has a $160 million uncommitted revolving letter of credit facility.

In 2014, Fitch expects CenturyLink's FCF (defined as cash flow from operations less capital spending and dividends) to range from $1.1 billion to $1.3 billion, similar to Fitch's estimate for 2013. Expected FCF levels reflect capital spending within the company's guidance of approximately $3 billion for 2013, and Fitch expects spending in 2014 at the same level. Within the capital budget, areas of focus for investment primarily 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 believes CenturyLink has the financial flexibility to manage upcoming maturities due to its FCF and credit facilities. In 2014 and 2015, maturities are approximately $0.7 billion and $0.5 billion, respectively.

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. Qwest Corporation (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., Qwest Services Corporation (QSC) and Savvis Inc. (d/b/a CenturyLink Technology Solutions) and its principal subsidiary.

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.

RATING SENSITIVITIES

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; and

--For QC or Embarq, which are notched up from CTL, leverage trends toward 2.5x or higher (based on external debt).

Fitch has taken the following rating actions. The Rating Outlook is Stable.

CenturyLink

--Long-term IDR affirmed at 'BB+';

--Senior unsecured $2 billion revolving credit facility affirmed at 'BB+';

--Senior unsecured debt affirmed at 'BB+'.

Embarq Corp.

--IDR affirmed at 'BB+';

--Senior unsecured notes affirmed at 'BBB-'.

Carolina Telephone & Telegraph (CT&T)

--IDR affirmed at 'BB+' and withdrawn as there is no longer outstanding long-term debt.

Embarq Florida, Inc. (EFL)

--IDR affirmed at 'BB+';

--First mortgage bonds affirmed at 'BBB-'.

Qwest Communications International, Inc. (QCII)

--IDR affirmed at 'BB+';

--Senior unsecured notes rating of 'BB+' withdrawn as there is no longer outstanding long-term debt.

Qwest Corporation (QC)

--IDR affirmed at 'BB+';

--Senior unsecured notes affirmed at 'BBB-'.

Qwest Services Corporation (QSC)

--IDR affirmed at 'BB+'.

Qwest Capital Funding (QCF)

--IDR affirmed at 'BB+';

--Senior unsecured notes affirmed at 'BB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Rating Global Telecoms Companies' (Aug. 9, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820169

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Contacts

Fitch Ratings, Inc.
Primary Analyst
John Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street,
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
John Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street,
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com