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Rating Action:

Moody's affirms CenturyLink's Ba3 CFR, outlook changed to stable

11 Sep 2019

New York, September 11, 2019 -- Moody's Investors Service (Moody's) has affirmed the Ba3 corporate family rating (CFR) for CenturyLink, Inc. (CenturyLink). Moody's has also affirmed CenturyLink's Ba3-PD probability of default rating (PDR), its senior unsecured rating of B2, and its senior secured rating of Ba3. The SGL-2 speculative grade liquidity rating (SGL) is unchanged. Moody's has also assigned a Ba3 rating to Level 3 Financing, Inc.'s proposed $500 million senior unsecured notes. The proceeds from the new notes, along with cash on hand, are expected to reduce debt and pay for transaction fees and expenses.

Moody's has changed CenturyLink's ratings outlook to stable from negative based on a more sustainable deleveraging trajectory following a meaningful dividend reduction in early 2019, strong execution on cost synergies since the Level 3 Parent, LLC (Level 3, f/k/a Level 3 Communications, Inc.) acquisition in November 2017 and solid opportunities for continuing transformational cost synergies over the next several years. Moody's expects this more conservative financial policy, which also targets company-defined net leverage of 2.75x to 3.25x by year-end 2021, will result in increased free cash flow from lower dividends being dedicated primarily to debt reduction over the next several years. Moody's now forecasts CenturyLink's leverage to steadily fall below 4.0x (Moody's adjusted) by year-end 2020 from a recent peak of 4.6x following the Level 3 acquisition. While the pressures of steady revenue declines across most of CenturyLink's business segments will take longer to stabilize than previously expected, Moody's believes that the company's increased free cash flow generation will enhance future operational and financial flexibility.

Affirmations:

..Issuer: CenturyLink, Inc.

.... Probability of Default Rating, Affirmed Ba3-PD

.... Corporate Family Rating, Affirmed Ba3

....Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD4)

....Senior Unsecured Regular Bond/Debenture, Affirmed B2 (LGD5)

..Issuer: Centel Capital Corp.

....Senior Unsecured Regular Bond/Debenture , Affirmed Ba2 (LGD3)

..Issuer: Embarq Corporation

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 (LGD3)

..Issuer: Embarq Florida, Inc.

....Senior Secured First Mortgage Bonds, Affirmed Baa3 (LGD1 from LGD2)

..Issuer: Level 3 Escrow II, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3 (LGD4)

..Issuer: Level 3 Financing, Inc.

....Senior Secured Bank Credit Facility, Affirmed Ba1 (LGD2)

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3 (LGD4)

..Issuer: Level 3 Parent, LLC

....Senior Unsecured Regular Bond/Debenture, Affirmed B1 (LGD5)

..Issuer: Qwest Corporation

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 (LGD3)

....Underlying Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 (LGD3)

..Issuer: Mountain States Telephone and Telegraph Co.

....Senior Unsecured Regular Bond/Debenture , Affirmed Ba2

..Issuer: Northwestern Bell Telephone Company

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba2

Assignments:

..Issuer: Level 3 Financing, Inc.

....Proposed $500 million Senior Unsecured Notes, Assigned Ba3 (LGD4)

Outlook Actions:

..Issuer: Centel Capital Corp.

....Outlook, Changed To Stable From Negative

..Issuer: CenturyLink, Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Embarq Corporation

....Outlook, Changed To Stable From Negative

..Issuer: Embarq Florida, Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Level 3 Financing, Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Level 3 Parent, LLC

....Outlook, Changed To Stable From Negative

..Issuer: Mountain States Telephone and Telegraph Co.

....Outlook, Changed To Stable From Negative

..Issuer: Northwestern Bell Telephone Company

....Outlook, Changed To Stable From Negative

..Issuer: Qwest Corporation

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

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. 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 declined 2.8% for year-end 2018 compared to the prior year. While current top line trends remain negative, a portion of the decline relates to the company's focus on profitable revenue management, which is expected to lessen in 2020. Moody's expects annual revenue declines to steadily shrink beginning in 2020.

CenturyLink has demonstrated strong cost cutting success at a faster than planned pace from initial Level 3 synergy targets, significantly offsetting the impact of revenue weakness on operating margins. CenturyLink increased its company-calculated adjusted EBITDA in 2018 by 4.3% over the prior year, and has identified further margin expansion opportunities over the next few years. Company-calculated adjusted EBITDA margins have increased every quarter since the close of the Level 3 transaction to 40.7% for the second quarter of 2019, up over 500 basis points from a pre-close third quarter 2017 level of 35.5%. With Moody's expectation for EBITDA margins to continue increasing 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 over the next three years. As of June 30, 2019, CenturyLink's leverage (Moody's adjusted) was 3.9x. Moody's expects leverage (Moody's adjusted) to sustainably remain below 4x through year-end 2020.

Moody's expects CenturyLink to have a good liquidity profile over the next 12 months, reflected by its SGL-2 SGL rating and supported by $410 million cash on hand as of June 30, 2019, our expectation of at least $1.6 billion of after dividend free cash flow for full year 2019 and approximately $1.4 billion of near term debt maturities.

CenturyLink also has $1.5 billion availability under its $2.2 billion senior secured revolving credit facility that expires in November 2022. 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 5x that steps down to 4.75x for December 31, 2019 and thereafter 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. Moody's expects CenturyLink to maintain at least $1.4 billion of availability under its revolver over the next 12 to 18 months.

The ratings for the debt instruments comprise both the overall probability of default rating of CenturyLink, to which Moody's maintains a PDR of Ba3-PD, an average family loss given default (LGD) assessment and the composition of the debt instruments in the capital structure.

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 CenturyLink's $9.8 billion secured credit facility, $10.5 billion of debt at Level 3, $6.1 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, the company's largest operating subsidiary, is rated Ba2 based on its structural seniority and relatively low leverage of 1.6x (Moody's adjusted) as of June 30, 2019. We note that CenturyLink has historically refinanced maturing debt at QC at this entity. Consequently, leverage at QC could increase over the next few years, since we expect its EBITDA to face pressure.

The senior unsecured notes of Level 3 Parent, LLC are rated B1 reflecting their junior position in the Level 3 credit pool. 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 that is rated Ba1. Leverage within the Level 3 credit pool was 3.6x (Moody's adjusted) as of June 30, 2019.

The senior unsecured debt of Embarq Corporation is rated Ba2, reflecting a structurally senior (relative to CenturyLink) claim on the assets of Embarq, which had leverage of 1.1x (Moody's adjusted) as of June 30, 2019. The senior secured debt of Embarq's operating subsidiary, Embarq Florida, Inc., is rated Baa3. The senior unsecured debt of Centel Capital Corp. is rated Ba2, in line with the unsecured debt at its guarantor, Embarq Corporation.

The stable outlook reflects CenturyLink's sustainable deleveraging trajectory following an early 2019 dividend reduction, 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 fall below 4x before 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.

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.

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 these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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 $22.8 billion in revenue over the last 12 months ended June 30, 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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

No Related Data.
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