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Rating Action:

Moody's upgrades Qwest's ratings; continues review for possible upgrade

13 Aug 2010

Approximately $13 billion of Debt Affected

New York, August 13, 2010 -- Moody's Investors Service has upgraded the corporate family rating (CFR) of Qwest Communications International, Inc. ("Qwest" or "the company") to Ba1 from Ba2 based on the company's success in reducing its financial leverage through debt repayment and on its solid financial results with good prospects for additional margin improvement as cost cutting initiatives and strategic growth programs continue to offset revenue declines within the company's legacy services. The company's ratings remain on review for upgrade, as Qwest's proposed merger with CenturyLink (rated Baa3) could lead to a further improvement in Qwest's credit profile.

"Qwest has produced strong results while facing the dual challenges of a structurally weak industry position and heavy macro-economic headwinds" said Moody's analyst Dennis Saputo. "This solid operational performance, combined with a record of proactive debt reduction has served Qwest well and results in the positive rating action today."

Qwest has reduced debt by 10% since 12/31/2009, and has communicated plans to continue deleveraging to a year-end 2010 total debt target of under $12 billion (GAAP). Management has consistently stated its commitment to debt reduction over the past several years. This culture of conservative capital allocation in line with management's desire to someday achieve an investment grade credit profile (a goal which we believe is fully embraced by Qwest's Board of Directors) coupled with the company's strict cost discipline (as reflected in its improved margins) are key factors in the rating action.

Moody's has taken the following rating actions:

At Qwest Communications International ("QCII"):

- $1.035 billion senior secured revolving credit facility (undrawn) scheduled to mature in 2013, upgraded to Ba2, LGD5 - 80%, from Ba3, LGD5 - 75% (based on a guarantee from QSC; also secured by a senior lien on the stock of QC)

- $2.650 billion of senior unsecured notes with various maturities through 2018, upgraded to Ba2, LGD5 - 80%, from Ba3, LGD5 - 81% (based on a guarantee by QSC)

- $1.265 billion Convertible Senior note scheduled to mature in 2025, upgraded to Ba3, LGD6 - 97%, from B1, LGD6 - 91% (not guaranteed by QSC)

At Qwest Capital Funding ("QCF"):

- $1.226 billion of senior unsecured notes with various maturities through 2031, upgraded to Ba3, LGD6 - 97%, from B1, LGD6 - 91% (based on a guarantee by QCII on a senior unsecured basis; not guaranteed by QSC)

At Qwest Corporation ("QC"):

- $7.968 billion of senior unsecured notes with various maturities upgraded to Baa3, LGD3 - 31%, from Ba1, LGD3 - 30% (this debt ranks highest in the capital structure since they have first claim on cash flow and assets of Qwest Corp.)

The Ba1 rating is supported by Moody's expectation that Qwest's leverage will be just over 3x (Debt to EBITDA, Moody's Adjusted) at year-end 2010 and that it will remain near this level through 2012. EBITDA margins are anticipated to improve slightly as the pace of cost reduction naturally slows and cost-cutting opportunities become more difficult to identify. Revenues are likely to continue to decline, although at a slower rate in the low-single-digit percentage range as Qwest's strategic growth priorities gain traction. The company's strategic initiatives of broadband/FTTN (Fiber-to-the-Node), fiber to the cell tower and advanced business services, combined with a focus on profitability in wholesale, are anticipated to offset legacy revenue weakness. This slower top line decline, coupled with stable margins is expected to lead to approximately flat EBITDA over the next 2-to-3 years.

Qwest faces a number of serious challenges going forward as a wireline-only carrier. The company continues to lose access lines, pressuring legacy revenue streams. Competition from the cable industry remains a threat to Qwest's market share in both the residential and small-to-medium business segments. Wireless substitution continues to be an additional headwind to growth. In addition to these structural challenges, macro-economic conditions are impacting top-line growth. Although Qwest's service territory has fared better through the downturn than other regions in the U.S., economic conditions remain subdued.

Moody's anticipates that Qwest will continue to retire debt upon maturity (its next maturity is in 2014), except at the operating company (Qwest Corporation) level. We also expect the company to maintain an ample cash balance that leaves considerable cushion for debt maturities well into the future. Moody's also anticipates that Qwest will make no material changes to its current dividend payout policy or payout ratio and that share repurchase activity will remain on hold.

In the event that the CenturyLink transaction fails to close, the rating would likely be confirmed with a stable outlook.

Moody's most recent rating action for Qwest Communications International was on April 22, 2010 at which time Moody's placed the ratings of QCII and its subsidiaries under review for upgrade

The principal methodology used in assigning ratings to Qwest is Moody's Global Telecommunications Industry rating methodology, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab (December, 2007, Report #106352). Other methodologies and factors that may have been considered in the process of rating Qwest can also be found in the Rating Methodologies sub-directory on Moody's website (including, among others: Probability of Default Ratings and Loss Given Default Assessments for Non-Financial Speculative-Grade Corporate Obligors in the United States and Canada (August 2006; document #98771) and Speculative Grade Liquidity Ratings (September 2002; document #76003)).

Qwest , headquartered in Denver, CO. is a RBOC and nationwide inter-exchange carrier (IXC). It served about 9.4 million access lines in 14 western states as of June 30, 2010.

New York
Dennis Saputo
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

Moody's upgrades Qwest's ratings; continues review for possible upgrade
No Related Data.
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