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Rating Action:

MOODY'S UPGRADES QWEST'S CORPORATE FAMILY RATING TO B1, CONFIRMS QWEST CORP.'S SR.UNSEC. AT Ba3, AND ASSIGNS B3 TO NEW SR. CONV. ISSUE. RATING OUTLOOK IS STABLE.

01 Nov 2005
MOODY'S UPGRADES QWEST'S CORPORATE FAMILY RATING TO B1, CONFIRMS QWEST CORP.'S SR.UNSEC. AT Ba3, AND ASSIGNS B3 TO NEW SR. CONV. ISSUE. RATING OUTLOOK IS STABLE.

Approximately $17 billion in rated debt affected.

New York, November 01, 2005 -- Moody's Investors Service upgraded Qwest Communication International, Inc.'s (QCII or Qwest) corporate family rating to B1 from B2 and confirmed Qwest Corporation's (QC) senior unsecured ratings. Qwest intends to issue the convertible security under a universal shelf put in place in August of 2005. In addition, Moody's narrowed the notching between ratings on debt of Qwest Service Corporation (QSC), Qwest Capital Funding (QCF), and QCII, as detailed below. This rating action concludes the review initiated on October 19, 2005. The outlook on all ratings is stable. Moody's also assigns a B3 rating to Qwest's newly launched senior convertible note issue maturing in 2025. Moody's expects Qwest to use the proceeds from this issue together with about $2.0 billion in cash to redeem high cost debt at QSC.

As part of this rating action, Moody's has assigned the following ratings at QCII:

Convertible Senior Notes due in 2025 -- B3

$2,500 million universal shelf registration -- (P)B2 / (P)B3

The following ratings have been upgraded:

At QCII:

Corporate Family Rating -- to B1 from B2

$800 million 7.5% senior notes due in 2014 - to B2 from B3 (guaranteed by QSC)

$525 million 7.25% senior notes due in 2011- to B2 from B3 (guaranteed by QSC)

$500 million 7.5% senior notes due in 2014 -- to B2 from B3 (guaranteed by QSC)

$750 million floating rate notes due in 2009 -- to B2 from B3 (guaranteed by QSC)

$62 million 7.5% senior unsecured notes due in 2008 (guaranteed by QSC and secured by second priority lien on QC stock) -- B3 from Caa1

$8 million 7.25% senior unsecured notes due in 2008 (guaranteed by QSC and secured by second priority lien on QC stock) -- B3 from Caa1

$11 million 9.47% senior unsecured notes due in 2007-- B3 from Caa2

$22 million 8.29% senior unsecured notes due 2008 -- B3 from Caa2

At QCF:

Senior unsecured long-term ratings -- B3 from Caa2

At QSC:

Senior secured bank facility -- B1 from B2

Senior subordinated notes -- B3 from Caa1

Moody's confirmed the following rating at QC:

Senior unsecured long-term ratings -- at Ba3

Senior unsecured long-term ratings (former obligor: Northwestern Bell Telephone Co.) - at Ba3

Senior unsecured long-term ratings (former obligor: Mountain States Telephone and Telegraph Co.) -- at Ba3

As part of this action, Moody's affirms Qwest's SGL-1 speculative grade liquidity rating.

The rating upgrade is based on expectations for continued improvements in Qwest's balance sheet and free cash flows as well as the elimination of some of the litigation overhang in light of the recently announced shareholder litigation settlement. Moody's believes that Qwest's recently announced tender offer for high coupon QSC senior subordinate notes will yield significant cash interest savings (estimated at about $300 million annually) and demonstrates the company's commitment to debt reduction. In addition, Moody's also expects a continued strengthening of Qwest's operations from in-region LD growth, as penetration and usage increase, and reduced losses at Qwest Communications Corp. (QCC), mainly because of the roll-off of uneconomical unconditional purchase obligations and improved business conditions. Strong pre-dividend free cash flow generated by local operations of QC also supports the corporate family rating. Moody's estimates these operations will enable Qwest to produce average annual free cash flow of roughly $950 million compared to current net debt of $20.2 billion (all metrics adjusted per Moody's published methodology).

The ratings of QC and QCII are constrained by continued assess line losses and QC margin pressure, which Moody's expects will increase as competition, especially from cable telephony providers, expands. In addition, Moody's believes that Qwest's conservative approach to fiber buildout and a facility based video offering will sustain its credit profile only to the extent that it uses cash savings to further reduce debt.

The rating outlook is stable. Moody's believes that additional improvements in free cash flow and leverage, though harder to realize than recent improvements, will offset the increasing business risk associated with rapidly increasing competitive challenges at QC. In addition, the DoJ investigation is still ongoing and ERISA lawsuits are still pending, and their ultimate financial impact is uncertain. The company currently has $100 Million reserved for potential settlements (after accounting for the recent $400 Million shareholder litigation settlement). At the current B1 rating level, Moody's does not believe that actual settlements will impair the company's credit metrics to a point that would generate additional rating pressure.

Qwest's ratings are unlikely to rise further without significant improvement in revenues in its core strategic businesses, sustainable margin improvement driving improved earnings and cash flow at Qwest's long haul operations in the intermediate term, and substantial deleveraging, such that consolidated free cash flow consistently exceeds 7.5% of debt.

Qwest's ratings could fall if QC, the primary cash flow producer, weakens such that its pre-dividend free cash flow falls below 10% of total debt. Moody's believes that this is most likely to occur if QC suffers accelerated access line erosion and subsequent cash flow deterioration, particularly from cable VoIP competition.

Moody's believes the company will continue to evaluate investment opportunities, and we remain concerned about the company's prior willingness to pay a premium for MCI's assets. Rating pressure would likely increase if the company depletes its cash reserves or incurs meaningful incremental debt in an M&A transaction.

Moody's views the QSC tender offer and $1.0 billion convertible debt issuance at QCII as a continuation of Qwest's strategy to simplify its capital structure and reduce leverage. As a result of this simplification and expectations for improved cash flow generating ability, Moody's is narrowing the notching between the different classes of debt in the Qwest corporate structure. The senior unsecured debt rating at QCF and the non-guaranteed senior unsecured debt rating at QCII have risen two notches to B3 in acknowledgement of the reduction of structurally senior debt at QSC, a lower corporate interest burden, and strong asset coverage. The upgrade from the Caa rating category reflects Moody's view that Qwest's significant debt reduction to date meaningfully reduces the likelihood of impairment in the event of a distressed scenario.

Moody's also confirms QC's senior unsecured ratings at a Ba3, one notch above the corporate family rating. The relative narrowing in notching between the ratings of QC and the corporate family rating reflects the simplification of the capital structure, the relative size of the debt at QC, and the expectation that Qwest will use cash flow generated at QC to service all other debt in the corporate structure.

The current notching assumes that Qwest will successfully tender for public debt at QSC. In the event that the tender offer fails to redeem the vast majority of the high-coupon debt at QSC, Moody's will reconsider the multiple notch upgrade of certain QCF and QCII debt. In addition, should the terms and conditions of the remaining 14% notes due in 2014 issued at QSC change as part of the tender offer, Moody's will likely revisit the rating on this issue.

Qwest is an integrated telecommunications company headquartered in Denver, CO.

New York
Dennis Saputo
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Julia Turner
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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