$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.
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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
