OREANDA-NEWS. Fitch Ratings has assigned a 'BB+' rating to CenturyLink, Inc.'s (CenturyLink) private offering of up to \$500 million of 10-year senior unsecured notes. Net proceeds from the offering will be used to repay indebtedness on its revolving credit facility, a portion of which was incurred to repay \$350 million of debt that matured on Feb. 15, 2015. CenturyLink's Issuer Default Rating (IDR) is 'BB+' and the Rating Outlook is Stable.

KEY RATING DRIVERS

The following factors support CenturyLink's ratings:

--Fitch's ratings are based on the expectation that CenturyLink will demonstrate steady improvement in its revenue profile over the next couple of years given that rates of decline have moderated to nominal levels and could be flat in 2015;
--Near-term consolidated free cash flows (FCFs) have strengthened and are expected to be relatively healthy in 2015;
--Liquidity is expected to remain relatively strong.

The following factors are embedded in CenturyLink's ratings:

--CenturyLink's financial policy, which incorporates a net leverage target of up to 3.0x;
--High margin voice revenues continue to decline but are largely being replaced by broadband and business services revenues. The latter sources have lower margins.

CenturyLink's consolidated revenues continue to show signs of reaching stability, declining by a modest 0.4% in 2014, after recording a 1.5% decline in 2013. Fitch continues to expect revenue growth from strategic areas, including high-speed data, advanced business services, as well as in managed hosting and cloud computing services, to contribute to longer-term revenue stability.

In May 2014, a 24-month, \$1 billion repurchase program became effective upon the completion of the previous \$2 billion share repurchase program and by the end of 2014, \$200 million of shares were repurchased. Share repurchases are being funded primarily out of free cash flow.

On a gross debt basis, CenturyLink's leverage at yearend 2014 was approximately 2.98x. Leverage has risen from the 2.84x posted in 2013 given slight pressure on EBITDA as service revenues continue to shift to lower margin but strategic broadband and business service revenue from higher-margin legacy voice revenues. Fitch believes leverage will remain around 3.0x over the next couple of years, in part due to a stabilization of EBITDA in 2016 or 2017, as newer strategic services achieve greater scale.

CenturyLink's total debt was \$20.7 billion at Dec. 31, 2014. Financial flexibility is provided through a \$2 billion revolving credit facility, which matures in December 2019. As of Dec. 31, 2014, approximately \$1.275 billion was available on the facility. CenturyLink also has a \$160 million uncommitted revolving letter of credit facility.

In 2015, Fitch expects CenturyLink's FCF (defined as cash flow from operations less capital spending and dividends) to be just over \$1 billion, and higher than the \$913 million in 2014. Expected FCF levels reflect capital spending within the company's guidance of approximately \$3 billion for 2015. Within the capital budget, areas of focus for investment include continued spending on data center/hosting, broadband expansion and enhancement, as well as spending on IPTV, the company's facilities-based video program.

Fitch believes CenturyLink has the financial flexibility to manage upcoming maturities due to its FCF and credit facilities. Maturing debt in 2015 totals \$550 million, of which \$350 million was repaid in February 2015. In 2016, maturities amount to approximately \$1.5 billion.

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 Embarq Corporation, Qwest Communications International Inc., Qwest Services Corporation (QSC) and Savvis Inc. (d/b/a CenturyLink Technology Solutions) and its principal subsidiary.

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.

KEY ASSUMPTIONS

--Fitch assumes revenues will be flat in 2015, and will grow in the low single digits beginning in 2016. EBITDA margins in 2015 and 2016 are expected to decline slightly from the 38.5% recorded in 2014 as higher margin legacy revenues continue to decline.

--In 2015, Fitch expects consolidated capital spending to approximate \$3 billion, similar to the amount spent in 2014. The company's \$1 billion share repurchase program, which became effective in May 2014, is expected to be completed over an 18-to-24 month period.

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 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 3.5x or higher.