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Rating Action:

Moody's lowers CenturyLink's senior unsecured rating to Ba2; outlook stable

14 Mar 2013

Short term rating lowered to Not-Prime

NOTE: On May 13, the press release was revised as follows: In the list of rating actions taken on Carolina Telephone & Telegraph Co., corrected the bonds to Senior Unsecured from Senior Secured. Revised release follows.

New York, March 14, 2013 -- Moody's Investors Service ("Moody's") has downgraded CenturyLink, Inc.'s ("CenturyLink" or "the company") senior unsecured debt rating to Ba2 from Baa3 and assigned a Corporate Family Rating of Ba1. As part of the rating action, Moody's has downgraded the short-term rating of CenturyLink to Not Prime from Prime-3 and assigned a speculative grade liquidity rating of SGL-4. The senior unsecured ratings of Embarq Corporation and Qwest Corporation were confirmed at Baa3 while the ratings of all other subsidiaries were downgraded by one notch. The downgrade reflects our expectation that CenturyLink's leverage (Debt to EBITDA) will remain elevated as a result of its decision to abandon its long-standing leverage target (Debt to EBITDA) of the low two's to 2.5 times and resume share repurchases. The company also announced a 26% reduction in its common stock dividend. The outlook for CenturyLink's ratings is stable. The rating action concludes the review of CenturyLink's ratings that was initiated on February 13, 2013.

Moody's has taken the following rating actions:

CenturyLink, Inc.

..Corporate Family Rating: Assigned Ba1

..Probability of Default Rating: Assigned Ba1-PD

.. Senior Unsecured Commercial Paper: Downgraded to NP, from P-3

..Speculative Grade Liquidity rating: Assigned SGL-4

.. Senior Unsecured Regular Bond/Debenture: Downgraded to Ba2 (LGD5, 85%), from Baa3

.. Senior Unsecured Bank Credit Facility: Baa3 (LGD3, 37%), from Baa3

..Senior Unsecured Shelf: Downgraded to (P)Ba2, from (P)Baa3

..Preferred Shelf: Downgraded to (P)Ba3, from (P)Ba2

..Outlook: Stable, from Ratings Under Review

Qwest Communications International Inc.

.. Senior Unsecured Regular Bond/Debenture: Downgraded to Ba1 (LGD4, 63%), from Baa3

..Outlook: Stable, from Ratings Under Review

Qwest Capital Funding Inc.

.. Senior Unsecured Regular Bond/Debenture: Downgraded to Ba1 (LGD4, 63%), from Baa3

..Outlook: Stable, from Ratings Under Review

Qwest Corporation

.. Senior Unsecured Regular Bond/Debenture: Baa3 (LGD3, 31%), from Baa3

..Outlook: Stable, from Ratings Under Review

Mountain States Telephone & Telegraph Co.

..Outlook: Stable, from Ratings Under Review

Northwestern Bell Telephone Company

..Outlook: Stable, from Ratings Under Review

Embarq Corporation

.. Senior Unsecured Regular Bond/Debenture: Baa3 (LGD3, 37%), from Baa3

..Outlook: Stable, from Ratings Under Review

Centel Capital Corp.

.. Senior Unsecured Regular Bond/Debenture: Downgraded to Baa3 (LGD3, 31%), from Baa2

..Outlook: Stable, from Ratings Under Review

Embarq Florida, Inc.

..Senior Secured First Mortgage Bonds: Downgraded to Baa2 (LGD2, 12%), from Baa1

..Outlook: Stable, from Ratings Under Review

Carolina Telephone & Telegraph Co.

..Senior Unsecured First Mortgage Bonds: Downgraded to Baa2 (LGD2, 12%), from Baa1

..Outlook: Stable, from Ratings Under Review

United Telephone Co. of Pennsylvania

..Senior Secured First Mortgage Bonds: Downgraded to Baa2 (LGD2, 12%), from Baa1

..Outlook: Stable, from Ratings Under Review

RATINGS RATIONALE

"The downgrade of CenturyLink's rating reflects Moody's view that management's tolerance for higher financial leverage is inconsistent with an investment grade rated wireline telecom service provider," stated Dennis Saputo, Moody's Senior Vice President. On February 13, 2013, the company announced revisions to its capital allocation strategy including a new goal to maintain leverage at less than 3.0 times Debt to EBITDA (about 3.5 times including Moody's standard adjustments for leases and pensions). Consequently, the company's leverage will remain elevated compared to our prior view. And, while the 26% reduction in the common stock dividend would, all else being equal, be considered a positive development for bondholders, it does not offset the negative impact of management's tolerance for higher leverage. Furthermore, CenturyLink's announcement that it is likely to direct more cash to repurchase common stock than it saves from reducing its dividend by 26% is negative for its credit rating. Finally, Moody's believes that the company is unlikely to return to its prior leverage target as the new capital structure supports higher equity returns and reduces the imbalance between its cost of debt and cost of equity.

CenturyLink's Ba1 Corporate Family Rating largely reflects the challenges that it faces in reversing the downward pressure on revenues and sustaining EBITDA margins exacerbated by a tolerance for higher leverage. At the same time, the ratings benefit from the predictability of the company's cash flows and its broad scale of operations.

Moody's believes that revenue expansion will prove elusive for the next two to three years as modest growth in enterprise and hosting services fail to offset ongoing consumer and wholesale weakness. More significantly, EBITDA will come under pressure as merger synergies from recent acquisitions fade and ongoing efforts to improve business efficiency fail to offset the negative margin impact of an unfavorable product mix shift. In addition, the company is likely to continue investing in various growth opportunities (enterprise, hosting, broadband, etc.) in an effort to drive long-term revenue and profit growth. These investments will initially pressure overall margins before they begin producing a return.

Capital spending is expected to remain relatively stable over the next few years with the company continuing to expand its IPTV footprint and invest in other growth initiatives (i.e. data center capacity, managed hosting and broadband expansion). Interest expense will trend up slowly, but steadily due mainly to higher interest costs on refinanced debt. And, cash taxes will begin to absorb an increasing percentage of the company's pretax income beginning in 2015, when CenturyLink is expected to have fully utilized its federal income tax net operating loss carry forwards. Consequently, Moody's believes that the boost to free cash flow generated by the dividend reduction will erode over time. Even after the 26% reduction, CenturyLink's dividend will still consume almost half of its discretionary cash flow.

CenturyLink had a history of temporarily exceeding its target leverage, followed by decisive debt reduction. However, past instances of higher leverage were primarily driven by strategic M&A and offered post-transaction cash flow growth. In this instance, CenturyLink may fund a portion of its planned share repurchases with debt, a strategy that will not benefit future leverage (i.e. Debt/EBITDA) levels. "We view the new leverage guidelines as permanent," continued Saputo. While management has indicated that the company could take as much as two years to complete the current share repurchase authorization, even if CenturyLink stops or pauses the repurchase activity, acquisitions and/or new share repurchase authorizations are likely over the next few years, and leverage will likely remain close to or very slightly above current levels. LTM to December 31, 2012, Debt to EBITDA (Moody's adjusted) was 3.3 times. Moody's had previously identified Debt to EBITDA (Moody's adjusted) above 3.0 times as a downgrade trigger.

The stable outlook reflects Moody's view that the Company will continue to generate healthy levels of free cash flow while maintaining leverage very comfortably below its revised goal of less than 3.0 times Debt/EBITDA (excluding Moody's adjustments). Pushing leverage all the way to the new target would be inconsistent with a Ba1 CFR.

CenturyLink currently has a weak liquidity profile and is assigned a Speculative Grade Liquidity ("SGL") rating of SGL-4 largely due to our expectations concerning the timing of share repurchases which for our analysis are expected to be $875 million in 2013, $1.0 billion in 2014 and $125 million in 2015.

At the end of 2012, CenturyLink had almost $200 million in cash and about $1.2 billion available under its credit facility. For 2013, we expect CenturyLink to generate about $5.6 billion in cash flow from operations (including integration costs, synergies and pension funding) while investing about $2.9 billion in the network and paying dividends of about $1.3 billion, resulting in about $1.4 billion of free cash flow. Debt maturities total $1.1 billion and, as noted above, share repurchases are expected to be $875 million in 2013.

While we recognize that the Company has predictable cash flow generation and should be well in compliance with its financial covenants during 2013, we estimate that without raising external capital, CenturyLink borrowings under its credit facility would peak at about $1.4 billion during 2Q and 3Q of 2013 and that the company would end the year with less than $700 million available under its revolver.

Moody's expects free cash flow in 2014 to be close to the $1.4 billion generated in 2013. In 2014, debt maturities total $700 million and, as noted above, share repurchases are expected to total $1.0 billion.

CenturyLink's existing $2.0 billion revolving credit facility expires in April 2017. The facility, which has 18 lenders, has same day availability and does not contain a material adverse change clause. The company's ability to borrow under the facility reduces commensurately with the amount outstanding under the company's commercial paper programs, which in turn is effectively limited to the amount available under the credit facility. Based on our expectations of the company's operating performance, we estimate CenturyLink will maintain ample cushion under the financial covenants contained in the revolving credit facility. The facility contains various covenants, including two financial covenants that limit total funded debt to consolidated EBITDA to no more than 4.0 times (as defined under the credit agreement) and consolidated interest expense and preferred stock dividends to consolidated EBITDA to not less than 1.5 times. We estimate the company is well in compliance with a debt ratio of about 2.6 and interest coverage of about 5.7 times on December 31, 2012. The facility also contains covenants limiting Qwest Corp. debt of 2.85x ongoing and 2.35x prior to the incurrence of additional debt. Borrowings under the credit facility are guaranteed by two of the company's wholly-owned subsidiaries, Embarq Corp. and Qwest Communications International Inc. ("QCII") and one of QCII's wholly-owned subsidiaries, Qwest Services Corporation.

The downgrade of CenturyLink's senior unsecured rating from Baa3 to Ba2 reflects its junior position in the capital structure and the relatively significant amount of senior debt that is likely to remain outstanding at Qwest Corporation.

Moody's confirmed the Baa3 rating on CenturyLink's credit facility reflecting the structural seniority provided by the subsidiary guarantees.

The senior unsecured debt of Qwest Corporation, the Company's largest operating subsidiary, is confirmed at Baa3 based on its structural seniority and relatively low leverage of about 2.2 times Debt to EBITDA (Moody's adjusted) as of LTM September 30, 2012. We note that CenturyLink plans to refinance maturing debt at Qwest Corporation at this entity. Consequently, we expect leverage at Qwest Corporation to increase for the next few years, at least, since we expect its EBITDA to continue to decline.

The senior unsecured debt of Qwest Communications International, Inc. ("QCII) and Qwest Capital Funding, Inc. (which is guaranteed by QCII) is downgraded from Baa3 to Ba1 in accordance with our LGD methodology reflecting its intermediate position in the capital structure between Qwest Corporation and CenturyLink, Inc.

The senior unsecured debt of Embarq Corporation ("Embarq") is confirmed at Baa3. CenturyLink has indicated that it plans to refinance debt that matures at this entity at the parent company level (CenturyLink, Inc.). Consequently, we expect leverage at Embarq Corporation (3.1 times Debt to EBITDA, Moody's adjusted, as of LTM September 30, 2012) to decline over time.

The senior secured debt of Embarq's operating subsidiaries, Embarq Florida, Inc., United Telephone Company of Pennsylvania, and Carolina Telephone & Telegraph Company are all downgraded from Baa1 to Baa2. These securities benefit from structural seniority and the pledge of assets of the operating companies.

The senior unsecured debt of Centel Capital Corporation (guaranteed by its direct parent, Centel Corporation) has been downgraded from Baa2 to Baa3 reflecting its structural subordination to the secured debt of the subsidiaries of Centel Corporation, which include Embarq Florida.

Although unlikely given the company's new leverage target, Moody's could raise CenturyLink's ratings if leverage were to be sustained below 3.0x (Debt / EBITDA, Moody's adjusted) and free cash flow to debt were in the high single digits. More importantly, we would need evidence that management is committed to a more conservative financial policy.

Moody's could lower the ratings further if one of the following occurs: a) leverage (Debt / EBITDA, Moody's adjusted) were to exceed 3.4x or free cash flow to debt fell below 5% on a sustained basis; b) revenues or EBITDA materially underperformed our expectations; c) management were to signal further tolerance of additional financial leverage.

The principal methodology used in this rating was the Global Telecommunications Industry Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Dennis Saputo
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's lowers CenturyLink's senior unsecured rating to Ba2; outlook stable
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