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Rating Action:

Moody's assigns Ba3 to CenturyLink's proposed senior unsecured notes

10 Jun 2020

New York, June 10, 2020 -- Moody's Investors Service (Moody's) has assigned a Ba3 to CenturyLink, Inc.'s (CenturyLink) proposed $1 billion senior unsecured notes due 2028 (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 5.375% senior notes due 2022 and for general corporate purposes. All other ratings including the company's Ba3 corporate family rating (CFR) and stable outlook are unchanged.

Assignments:

..Issuer: Level 3 Financing, Inc.

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

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. 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 declined 3.7% year over year in the first quarter of 2020, but these revenue declines have steadily shrunk for the last four 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 for first quarter of 2020 decreased slightly compared to the same period a year ago. However, company-calculated adjusted EBITDA margins have increased steadily since the close of the Level 3 transaction to 42.9% for the first quarter of 2020, up almost 750 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 an expected three year period ending in 2022. As of March 31, 2020, CenturyLink's leverage (Moody's adjusted) was 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 $1.6 billion cash on hand as of March 31, 2020, and our expectation of at least $2.1 billion of after dividend free cash flow for full year 2020. The company has approximately $1.1 billion of near term debt maturities.

CenturyLink also has $0.825 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 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 as of March 31, 2020 $9.1 billion of debt at CenturyLink, $10.1 billion of debt at Level 3, $4.9 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 3.4x (Moody's adjusted) as of March 31, 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 December 31, 2019. 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 RATING

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 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.

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 $22.2 billion in revenue over the last 12 months ended March 31, 2020.

REGULATORY DISCLOSURES

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.

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.

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

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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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