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Rating Action:

Moody's rates Level 3's new issue Caa1; outlook remains stable

01 Mar 2011

$500 million of new senior unsecured notes rated

Toronto, March 01, 2011 -- Moody's Investors Service (Moody's) rated Level 3 Financing, Inc.'s (Financing) new $500 million senior unsecured 8-year notes Caa1. Financing is a wholly-owned subsidiary of Level 3 Communications, Inc. (Level 3). Level 3 has a Caa1 corporate family rating (CFR), a Caa1 probability of default rating (PDR), an SGL-1 speculative grade liquidity rating (indicating very good liquidity), and a stable ratings outlook. Together with cash on hand, proceeds from the new issue will be used to redeem a portion of Financing's $1.25 billion 9.25% Senior Notes due 2014. The transaction is positive as it extends Level 3's consolidated weighted average term to maturity, however, the company's consolidated credit profile is substantially unaffected. Accordingly, Level 3's ratings and outlook remain unchanged and the new notes are rated at the same Caa1 level as the notes being replaced.

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

Rating and Outlook Actions:

..Issuer: Level 3 Financing, Inc.

....Senior Unsecured Regular Bond/Debenture Assigned Caa1 (LGD4, 55%)

....Senior Secured Bank Credit Facility, Unchanged at B1 (LGD1, 8%)

....Senior Unsecured Regular Bond/Debenture, Unchanged at Caa1 with the LGD Assessment revised to LGD4, 55% from LGD4, 53%

..Issuer: Level 3 Communications, Inc.

Corporate Family Rating, Unchanged at Caa1

Probability of Default Rating, Unchanged at Caa1

Speculative Grade Liquidity Rating, Unchanged at SGL-1

Outlook Unchanged at Stable

....Senior Unsecured Regular Bond/Debenture, Unchanged at Caa3 with the LGD Assessment revised to LGD5, 89% from LGD5, 88%

....Senior Unsecured Conv./Exch. Bond/Debenture, Unchanged at Caa3 with the LGD Assessment revised to LGD5,89% from LGD5, 88%

RATINGS RATIONALE

Level 3's corporate family and probability of default ratings (CFR and PDR respectively) are Caa1 and the rating outlook is stable. The primary ratings influence continues to stem from concerns that the company's capital structure is not sustainable over the long term. While Level 3 has a fundamentally sound business proposition, being well positioned as a network infrastructure provider to benefit from expanding bandwidth demand and the conversion of telephony to IP-based capacity, we are concerned that the company will not consistently be able to generate enough cash flow to cover both capital expenditures and interest expense and have any surplus with which to reduce its debt load. With approximately $3.7 billion of annual revenue and +/- 25% EBITDA margins, EBITDA would be $925 million. With cash interest of some $535 million, a significant +/- 57% of the EBITDA stream, there is but $390 million, or about 11% of revenue, remaining to allocate towards capital expenditures. We think this is likely to be somewhat less than optimal capital spending and, irrespective, there is no surplus with which to amortize debt. And with some $887 million of deferred revenue on its balance sheet, Level 3 has to continually replenish the deferred revenue run-off in order that the non-cash component of revenue and EBITDA does not further augment potential cash flow deficits. It is clear that the viability of Level 3's capital structure depends on top-line growth and margin expansion. In the context of relatively low general economic growth and with significant competition, it is not clear we can expect more than moderate cash flow growth for the next year or two. This is quite important given pending refinance activity related to 2014 maturities. Notwithstanding, Level 3 has consistently demonstrated access to the capital markets, maintains relatively large cash balances that generally provide adequate forward cover for +/- 18 months of operations. The resulting solid liquidity position provides support for the rating and allows the outlook to be positioned as stable.

Rating Outlook

Given expectations for low growth, we do not expect a dramatic improvement in the company's risk profile. Reciprocally, downside risk is mitigated by the company's very good liquidity position. Given this background, Level 3's ratings outlook is stable.

What Could Change the Rating - Up

As recessionary conditions abate and market conditions normalize, upon it appearing that the company can be cash flow self-sufficient on a sustainable basis, positive ratings and outlook actions are probable; Debt/EBITDA of less than 7x would be a reasonable indication of same.

What Could Change the Rating - Down

Adverse liquidity developments or significant debt-financed acquisition activity are the most likely catalysts of potential negative ratings activity.

The principal methodologies used in this rating were Global Telecommunications Industry published in December 2007, Probability of Default Ratings and Loss Given Default Assessments published in June 2009, and Speculative Grade Liquidity Ratings published in September 2002.

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 communications and Internet backbones.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Toronto
Bill Wolfe
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

Toronto
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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​
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