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Global Credit Research - 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
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
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
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
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,
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades Qwest's ratings; continues review for possible upgrade
250 Greenwich Street
New York, NY 10007
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