Rating Action: Moody’s assigns Ba3 to CenturyLink’s proposed senior unsecured notes
Global Credit Research – 07 Aug 2020
New York, August 07, 2020 — Moody’s Investors Service (Moody’s) has assigned a Ba3 to CenturyLink, Inc.’s (CenturyLink) proposed $840 million senior unsecured notes due 2029 (Unsecured Notes) which will be issued by Level 3 Financing, Inc. (LFI). The net proceeds from the sale of the Unsecured Notes, together with cash on hand, will be used to pay down the 5.625% senior notes due 2023 and the 5.125% senior notes due 2023 as well as for general corporate purposes. All other ratings including the company’s Ba3 corporate family rating (CFR) and stable outlook are unchanged.
..Issuer: Level 3 Financing, Inc.
….Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD4)
CenturyLink’s Ba3 CFR reflects its predictable and further enhanced cash flow from its 2019 dividend reduction, its broad base of operations and strong market position. The company’s publicly stated financial policy focuses on the longer term achievement of a company-calculated net debt to adjusted EBITDA range of 2.75x to 3.25x, with steady debt reductions over at least the next two years funded with discretionary free cash flow. In addition, CenturyLink’s continuing record of consistent network investment at a level generally above its peer group average demonstrates its commitment to its long term competitive position. These positives are offset by still high but declining leverage and revenue weakness across its business units, exacerbated by secular industry challenges and a highly competitive operating environment. Revenue contracted 3.4% in the second quarter of 2020 compared to the same period in the prior year, but this revenue contraction has steadily diminished from higher levels over the last five quarters.
CenturyLink has demonstrated strong cost cutting success at a faster than planned pace from initial synergy targets following its November 2017 acquisition of Level 3, significantly offsetting the impact of revenue weakness on operating margins. CenturyLink’s company-calculated adjusted EBITDA margin for Q2 2020 decreased slightly to 41.9% compared to the same period a year ago. However, company-calculated adjusted EBITDA margins have been steadily increasing since the close of the Level 3 acquisition and are up almost 650 basis points from a pre-close third quarter 2017 level of 35.5%. With Moody’s expectation for EBITDA margins to continue increasing on an annual basis along with increased free cash flow from the 2019 dividend cut, CenturyLink is now well-positioned to pay down about $2 billion of debt each year through year-end 2022. As of June 30, 2020, CenturyLink’s leverage (Moody’s adjusted) was approximately 4.1x.
Moody’s expects CenturyLink to have a good liquidity profile over the next 12 months, reflected by its SGL-2 speculative grade liquidity rating and supported by $1.8 billion cash on hand as of June 30, 2020, and our expectation of at least $2.1 billion of after dividend free cash flow for full year 2020. The company had approximately $2.9 billion of near term debt maturities as of June 30, 2020.
CenturyLink also has $1.125 billion of availability under its $2.2 billion senior secured revolving credit facility that expires in January 2025. With respect to the term loan A facilities and the revolver, the credit agreement requires CenturyLink to maintain a total leverage ratio of not more than 4.75x and a minimum consolidated interest coverage ratio of at least 2x. The term loan B facility is not subject to the leverage or interest coverage covenants. We estimate CenturyLink will remain comfortably in compliance with the total leverage ratio and interest coverage ratio for the next 12 to 18 months
The instrument ratings reflect both the probability of default of CenturyLink, as reflected in the Ba3-PD probability of default rating, an average expected family recovery rate of 50% at default and the loss given default (LGD) assessment of the debt instruments in the capital structure based on a priority of claims.
CenturyLink’s corporate structure includes two layers of debt (secured/unsecured) at the holding company (CenturyLink, Inc.) level and three main operating company credit pools (Qwest Corporation, Embarq Corporation and Level 3 Parent, LLC) with multiple classes of debt within each.
At the holding company level, Moody’s rates the company’s secured credit facility Ba3 and unsecured notes B2. CenturyLink’s senior secured credit facilities, including its revolver and term loans, are rated Ba3, reflecting their senior position ahead of CenturyLink’s unsecured debt. The senior secured credit facilities are guaranteed by Wildcat Holdco LLC (Parent of Level 3 Parent, LLC), Qwest Communications International Inc. (QCII), Qwest Services Corp. (QSC), Qwest Capital Funding, Inc. (QCF) and Embarq Corporation (Embarq). The credit facility also benefits from a pledge of stock of Wildcat Holdco LLC, QCF and QSC. The B2 senior unsecured rating of CenturyLink Inc. reflects its junior position in the capital structure and the significant amount of senior debt, including as of June 30, 2020 $8.8 billion of debt at CenturyLink, $11.3 billion of debt at Level 3, $4.8 billion of debt at Qwest Corporation (QC), $0.4 billion of debt at QCF, and $1.6 billion of debt at Embarq and its subsidiaries. The senior unsecured debt of QC is rated Ba2 based on its structural seniority and relatively low leverage of 1.4x (Moody’s adjusted) as of March 31, 2020.
The senior unsecured notes of Level 3 Financing, Inc. (LFI) are rated Ba3, reflecting their structural seniority to Level 3 Parent, LLC, and junior position relative to LFI’s senior secured bank credit facility and senior secured notes which are rated Ba1. Leverage within the Level 3 credit pool was approximately 3.8x (Moody’s adjusted) as of June 30, 2020.
The senior unsecured debt of Embarq Corporation (Embarq) is rated Ba2, reflecting a structurally senior (relative to CenturyLink) claim on the assets of Embarq, which had leverage of 1.0x (Moody’s adjusted) as of March 31, 2020. The senior secured debt of Embarq’s operating subsidiary, Embarq Florida, Inc., is rated Baa3.
The stable outlook reflects CenturyLink’s sustainable deleveraging trajectory following an early 2019 dividend reduction, continued strong execution on cost synergies since the Level 3 acquisition in November 2017 and solid opportunities for continuing transformational synergies over the next several years. Moody’s expects that CenturyLink’s leverage (Moody’s adjusted) will steadily fall below 4.0x by year-end 2020, supported by solid operational execution and continued margin expansion despite continued secular pressures on top line growth, with excess cash flow dedicated to debt reduction.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:
Moody’s could downgrade CenturyLink’s CFR to B1 if leverage (Moody’s adjusted) increases above 4.25x or free cash flow turns negative, both on a sustained basis, or if capital investment is reduced to levels that could weaken the company’s competitive position. A sustained reversal in the currently declining pace of revenue contraction could also result in a downgrade.
Moody’s could upgrade CenturyLink’s CFR to Ba2 if both revenue and EBITDA were stabilized, leverage (Moody’s adjusted) was sustained below 3.75x and free cash flow to debt was in the high single digit percentage range.
The principal methodology used in this rating was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/research/Telecommunications-Service-Providers–PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
CenturyLink, Inc., headquartered in Monroe, Louisiana, is an integrated communications company that provides an array of communications services to residential, business, governmental and wholesale customers. In October of 2017, CenturyLink acquired Level 3 Parent, LLC, (f/k/a Level 3 Communications, Inc.) an international communications company with one of the world’s largest long haul communications and optical internet backbones. The company generated approximately $22.0 billion in revenue over the last 12 months ended June 30, 2020.
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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Neil Mack, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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