CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Qwest Corporation's (QC) offering of senior unsecured notes due 2055. QC is an indirect wholly owned subsidiary of CenturyLink, Inc. (CenturyLink). Net proceeds from the offering will be used to call QC's $250 million 7.2% notes due 2026, and any remaining proceeds will be used to repay a portion of its $1 billion 6.875% notes due 2033. 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 expectation that CenturyLink will demonstrate steady improvement in its revenue profile beginning in 2016, given Fitch's expectation of a decline of just under 1% in 2015 (revised from the previous expectation of nearly flat revenues in 2015);
--Near-term consolidated free cash flows (FCFs) have strengthened and are expected to be relatively healthy in 2015;
--Liquidity is expected to remain relatively strong over the rating horizon;
--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 the first half of 2015 (1H15), the pace of improvement in CenturyLink's consolidated revenue growth was set back to a modest degree by a sales force reorganization. Fitch now expects revenues to decline just under 1% in 2015, versus previous expectations that revenues would stabilize. Fitch continues to expect revenue growth from strategic areas, including high-speed data, Prism, advanced business services, as well as in managed hosting and cloud computing services, to contribute to longer-term revenue stability.
In May 2014, a 24-month, $1 billion share repurchase program became effective upon the completion of the previous $2 billion repurchase program and during the 1H15, $260 million of shares were repurchased. As of June 30, 2015, approximately $540 million was available under the 2014 share repurchase program. Share repurchases are being funded primarily out of FCF. Fitch does not expect CenturyLink to issue debt for future share repurchases.
On a gross debt basis, CenturyLink's leverage for the latest 12 months (LTM) ended June 30, 2015 was approximately 3.01x. Leverage has risen from the 2.84x posted in 2013 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.
In 2015, Fitch expects CenturyLink's FCF (defined as cash flow from operations less capital spending and dividends) to be 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). 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.
KEY ASSUMPTIONS
--Fitch assumes revenues will be down less than 1% in 2015, and will grow in the 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 expects consolidated capital spending to approximate $2.8 billion, down from approximately $3 billion spent in 2014. The company's $1 billion share repurchase program, which became effective in May 2014, is expected to be completed over an 18-to-24 month period.
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.
--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).
LIQUIDITY
CenturyLink's total debt was $20.4 billion at June 30, 2015. Financial flexibility is provided through a $2 billion revolving credit facility, which matures in December 2019. As of June 30, 2015, approximately $1.7 billion was available 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. Maturing debt in the remainder of 2015 is nominal. In 2016, maturities amount to approximately $1.4 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 CenturyLink.
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 Committee: March 27, 2015.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
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