Fitch Rates Qwest Corp.'s Senior Unsecured Note Offering 'BBB-/RR2'; Outlook Stable
KEY RATING DRIVERS
The following factors support CenturyLink's ratings:
--Revenues declined by 0.7% in 2015; Fitch expects that in 2016 and 2017 CenturyLink will demonstrate declines in the 0% to 2% range, with revenues potentially flattening in 2018.
--EBITDA continues to be slightly pressured, as revenues continue to shift to strategic but lower-margin broadband and business services from higher-margin legacy voice revenues. EBITDA is currently not expected by Fitch to stabilize until approximately 2018 or later.
--Near-term consolidated free cash flows (FCFs -- defined as cash flow from operations less capital spending and dividends) in the $400 million to $600 million range in 2016.
--Liquidity is expected to remain relatively strong over the rating horizon.
--QC's and Embarq Corp.'s (EC) issue ratings are based on their relatively lower leverage and their debt issues' senior position in the capital structure relative to CenturyLink's senior unsecured debt.
The following factors are embedded in CenturyLink's ratings:
--CenturyLink's financial policy, which incorporates a net leverage target of approximately 3.0x.
--Prospects for share repurchases funded by FCF.
In December 2015, CenturyLink completed a $1 billion common stock repurchase program under a 24-month program authorized in May 2014. Stock repurchases have been primarily funded from FCF. At the current time, no new program has been authorized although should the company succeed in selling its data center business the portion of the proceeds beyond that needed to maintain a leverage neutral profile may be used to repurchase stock. Fitch does not expect CenturyLink to issue debt for future share repurchases in Fitch's base case.
On a gross debt basis, CenturyLink's leverage for the latest 12 months (LTM) ended June 30, 2016 was 2.9x, virtually the same as the 3.0x during the previous year. Leverage has risen from the 2.8x posted in 2013, even though there has been a modest reduction in debt, as there has been some pressure on EBITDA. This pressure stems from the continued shift to lower-margin strategic services from high-margin legacy services such as voice. Fitch believes leverage will remain around 3.0x over the next couple of years.
Fitch expects capital spending within the company's guidance of approximately $3 billion for 2016. Within the capital budget, areas of focus for investment include continued spending on broadband expansion and enhancement, as well as spending on IPTV, the company's facilities-based video program. Capital spending also includes amounts for spending on the Connect America Fund Phase 2 (CAF 2) program.
KEY ASSUMPTIONS
--Fitch assumes in 2016 and 2017 CenturyLink will demonstrate revenue declines in the 0% to 2% range, with revenues potentially flattening in 2018. EBITDA margins in 2016 and 2017 are expected to decline slightly from the 38.4% recorded in 2015 as higher margin legacy revenues continue to decline.
--In 2016, Fitch estimates consolidated capital spending will approximate $3.0 billion, up from approximately $2.9 billion spent in 2015.
--Fitch has not included the potential sale of the data center colocation business in its assumptions as CenturyLink continues to evaluate its alternatives.
--Since Fitch's base case assumes CenturyLink continues to own and operate its data centers, Fitch has assumed a modest level of share repurchases in 2016 and 2017 funded by FCF.
RATING SENSITIVITIES
Fitch does not expect a positive rating action over the next several years based on its assessment of the competitive risks faced by CenturyLink and Fitch's expectations for leverage.
A negative rating action could occur if:
--Consolidated leverage through, but not limited to, operational performance, acquisitions, or debt-funded stock repurchases, is expected to be 3.25x or higher. Fitch has revised the leverage threshold down to 3.25x from 3.5x owing to the continued secular challenges faced by the wireline industry.
--A reduction in capital spending that, in Fitch's evaluation, affects future revenue growth.
--For QC or Embarq, which are notched up from CTL, leverage trends toward 2.5x or higher (based on external debt).
LIQUIDITY
CenturyLink's total debt was $19.9 billion at June 30, 2016, and readily available cash totalled $137 million (cash excludes $54 million in foreign bank accounts). Financial flexibility is provided through a $2 billion revolving credit facility that matures in December 2019. As of June 30, 2016, there were no borrowings outstanding on the facility. The company also has a $160 million uncommitted revolving letter of credit facility, which at June 30, 2016 had $109 million in letters of credit outstanding.
Fitch believes CenturyLink has the financial flexibility to manage upcoming maturities due to its FCF and credit facilities. In 2016, maturities only consist of $11 million of term loan amortization payments. Maturities amount to approximately $1.5 billion and $196 million in 2017 and 2018, respectively.
The principal financial covenants in the $2 billion revolving credit facility limit CenturyLink's debt to EBITDA for the past four quarters to no more than 4.0x and EBITDA to interest plus preferred dividends (with the terms as defined in the agreement) to no less than 1.5x. QC has a maintenance covenant of 2.85x and an incurrence covenant of 2.35x. The facility is guaranteed by certain material subsidiaries of CenturyLink.
Going forward, Fitch expects CenturyLink and QC will be CenturyLink's only issuing entities. CenturyLink has a universal shelf registration available for the issuance of debt and equity securities.
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