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Rating Action:

Moody's affirms Level 3's ratings, changes outlook to stable

31 Oct 2016

Approximately $10.8 billion of rated debt and credit commitments affected

Toronto, October 31, 2016 -- Moody's Investors Service, (Moody's) affirmed Level 3 Communications, Inc.'s (Level 3's) Ba3 corporate family rating (CFR) along with ratings of the company's existing debt instruments (refer to the ratings listing below), following the announcement of CenturyLink, Inc.'s proposed acquisition of Level 3 (CenturyLink, Ba2 under review down), in a cash and stock transaction which values Level 3 at nearly $35 billion. As part of the same rating action, Moody's affirmed Level 3's Ba3-PD probability of default rating (PDR), SGL-2 speculative grade liquidity rating (indicating good liquidity), and changed the company's ratings outlook to stable from positive.

Bill Wolfe, a Moody's senior vice president, indicated that "The ratings affirmation is based on our assessment that CenturyLink's acquisition is not likely to cause any of Level 3's debt instrument ratings to change." This followed a separate release in which Moody's placed CenturyLink's ratings on review for downgrade from Ba2, citing higher leverage related to the debt financing component of the proposed transaction. Moody's noted that its review would focus on the combined entity's leverage and cash flows, as well as its growth potential and, based on the proposed transaction structure, a downgrade of CenturyLink's CFR was expected to be limited to one notch, to Ba3.

Wolfe also indicated that Level 3 would be part of an entity with, potentially, the same Ba3 CFR as Level 3 has now, and debt holder access to cash flow and assets would not change. "While Level 3 becomes part of a much larger entity that, given its substantial scale and improved cost profile after synergies are realized, will be better able to compete in the fixed-line enterprise telecommunications market, the related benefits are at least partially off-set by the likelihood that Level 3 will distribute cash to its more highly levered parent to help service acquisition-related debt." Wolfe also indicated that the transaction will allow Level 3's large pool of net operating losses to be monetized, augmenting free cash flow of the combined entity.

Level 3's ratings outlook was changed to stable from positive because Level 3's debt instrument ratings are expected to survive the acquisition at their prevailing levels and, in the intervening period, Moody's expects Level 3's solid performance to continue, thereby substantiating the existing Ba3 CFR as well as related instrument ratings. Should the transaction proceed, Moody's expects to withdraw Level 3's CFR, PDR, and SGL-2 speculative grade liquidity rating concurrent with closing which, pending normal regulatory approvals, is expected in the third quarter of 2017.

Level 3 Communications, Inc., headquartered in Broomfield, Colorado, is a publicly traded international communications company with one of the world's largest long-haul communications and optical Internet backbones.

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.

The following summarizes today's rating actions and Level 3's ratings:

..Issuer: Level 3 Communications, Inc.

.... Corporate Family Rating, Affirmed at Ba3

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

.... Speculative Grade Liquidity Rating, Affirmed at SGL-2

.... Outlook, Changed to Stable from Positive

....Senior Unsecured Regular Bond/Debenture, Affirmed at B2 (LGD6)

..Issuer: Level 3 Financing, Inc.

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

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

.... Outlook, Changed to Stable from Positive

..Issuer: Level 3 Escrow II, Inc. (assumed by Level 3 Financing, Inc.)

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

RATINGS RATIONALE

Level 3's Ba3 CFR is based on the company's solid business and financial profile, Moody's expectation of modest margin improvement as Internet Protocol-based services continue to replace legacy services, and leverage of debt/EBITDA approaching 3.75x in 2017. The rating is constrained by a lack of forwards earnings visibility and off-market liquidity arrangements which rely solely on cash and free cash flow. In the event of an acquisition by CenturyLink, Level 3's debt instrument ratings are expected to survive at their prevailing levels and, in the intervening period, Moody's expects Level 3's solid performance to continue.

Level 3's liquidity is assessed as good, SGL-2, based on expectations of free cash flow of about $1 billion over the next year and the company having a June 30, 2016 cash balance of $1.3 million. Moody's expects a telecommunications company of Level 3's stature to maintain liquidity of between 10% and 15% of its revenues, indicating that Moody's views the entirety of the company's cash position as being integral to its liquidity. That said, with no debt maturities until 2018 and with no financial covenants to comply with, the combination of the cash on hand and cash to be generated over the next year provide good liquidity.

Rating Outlook

The ratings outlook is stable because Level 3's instrument ratings are, based on existing deal parameters, expected to remain unchanged following the company's acquisition by CenturyLink and, in the intervening period, ratings are supported by Level 3's ongoing solid performance and leverage of debt/EBITDA trending towards 3.75x..

What Could Change the Rating -- Up

• Continued solid operating performance and margin expansion

• Solid liquidity arrangements

• Leverage of Debt/EBITDA approaching 3.5x on a sustainable basis (4.3x at 30Jun16)

• Free Cash Flow/Debt approaching 10% on a sustainable basis (7.4% at 30Jun16)

What Could Change the Rating -- Down

• Debt/EBITDA sustained above 4.5x (4.3x at 30Jun16)

• Free Cash Flow/Debt sustained below 5% (7.4% at 30Jun16)

• Deteriorating business performance including elevated churn and integration set-backs

• Weaker liquidity arrangements

The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Corporate Profile

Headquartered in Broomfield, Colorado, Level 3 Communications, Inc. (Level 3) is a publicly traded international communications company with one of the world's largest long-haul communications and optical Internet backbones. Level 3's 2016 revenue is expected to be approximately $8.5 billion and annual (Moody's adjusted) EBITDA to be $3.2 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

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.

Bill Wolfe
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

No Related Data.
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