OREANDA-NEWS. Fitch Ratings will maintain the 'BB+/RR1' issue rating on Level 3 Financing, Inc.'s (Level 3 Financing) proposed senior secured term loan that is expected to be used to refinance the company's existing equivalent sized tranche B term loan due January 2022. Level 3 Financing is a wholly owned subsidiary of Level 3 Communications, Inc. (LVLT). The Issuer Default Rating (IDR) for both LVLT and Level 3 Financing is 'B+' with a Positive Outlook. LVLT had approximately \$11.5 billion of consolidated debt outstanding on March 31, 2015.

The terms of the new credit facility, including the security and guaranty structure are expected to be substantially similar to the existing Tranche B 2022 term loan. Outside of an expected reduction of interest expense related to this transaction, LVLT's credit profile has not substantially changed.

KEY RATING DRIVERS

--LVLT remains committed to operate within its 3x to 5x net leverage target. The enhanced scale and ability to generate meaningful free cash flow (FCF) resulting from the TW Telecom, Inc. (TWTC) acquisition reinforces Fitch's expectation for further strengthening of LVLT's credit profile.

--The TWTC acquisition increases LVLT's scale and focus on high-margin enterprise account revenues while increasing the company's overall competitive position and ability to capture incremental market share;

--The acquisition is clearly in line with LVLT's strategy to shift its revenue and customer focus to become a predominantly enterprise-focused entity.

--The company is poised to generate sustainable levels of FCF (defined as cash flow from operations less capital expenditures and dividends). Fitch anticipates LVLT FCF generation will grow to nearly 10% of revenues by year-end 2016 on a pro forma basis.

--The operating leverage inherent to LVLT's business model positions the company to expand both gross and EBITDA margins.

Consolidated leverage, pro forma for the TWTC acquisition, is 4.6x before consideration of any operating cost synergies and declines to 4.3x after factoring in \$200 million of anticipated operating cost synergies. LVLT leverage increased year-over-year to 5.6x on an actual basis as of March 31, 2015 as a result of the effect of acquisition financing. Fitch continues to expect LVLT's credit profile will strengthen as the company benefits from anticipated EBITDA growth, FCF generation and cost synergies related to the TWTC acquisition.

The TWTC acquisition improves LVLT's ability to generate consistent levels of FCF. Fitch anticipates LVLT FCF generation will grow to nearly 10% by year-end 2016 on a pro forma basis. The company has generated approximately \$324 million of FCF through the LTM ended March 31, 2015. Fitch believes the company's ability to grow high-margin core network services (CNS) revenues coupled with the strong operating leverage inherent to its operating profile position the company to generate consistent levels of FCF.

The TWTC acquisition is in line with LVLT's strategy to shift its revenue and customer focus to become a predominately enterprise-focused entity. TWTC's strong metropolitan network supports LVLT's overall strategy. Pro forma for the transaction, LVLT's revenue from enterprise customers increases to 72% of total CNS revenue from 68%. From a regional perspective, North America CNS revenue would increase to 79% of total CNS revenue, up from approximately 73%.

LVLT's network capabilities, in particular its strong metropolitan network, along with a broad product and service portfolio emphasizing Internet protocol (IP)-based infrastructure and managed services provide the company a solid base to grow its enterprise segment revenues. Fitch believes that revenue growth prospects within LVLT's CNS segment stand to benefit from the transition among enterprise customers from legacy time division multiplexing (TDM) communications infrastructure to Ethernet or IP VPN infrastructure based on IP.

Fitch believes that LVLT's liquidity position is adequate given the rating, and that overall financial flexibility is enhanced with positive FCF generation. The company's liquidity position is primarily supported by cash carried on its balance sheet which as of March 31, 2015 totaled approximately \$567 million (pro forma for the redemption of 9.375% senior notes due 2015), and expected FCF generation. As of Dec. 31, 2014, \$63 million of cash was denominated in Venezuelan bolivares. LVLT does not maintain a revolver, which limits its financial flexibility in Fitch's opinion. LVLT's maturity profile is manageable within the context of FCF generation expectations and access to capital markets. As expected, LVLT converted approximately \$333 million outstanding principal remaining on its 7% convertible senior notes due 2015 into approximately 12 million shares of LVLT common. The company does not have material scheduled maturities during the remainder of 2015, and the next scheduled maturity is not until 2018 when approximately \$300 million of debt is scheduled to mature.

RATING SENSITIVITIES

What Could Lead to a Positive Rating Action:

--Consolidated leverage maintained at 4x or lower;
--Consistent generation of positive FCF, with FCF-to-adjusted debt of 5% or greater;
--Positive operating momentum characterized by consistent core network service revenue growth and gross margin expansion.

What Could Lead to a Negative Rating Action:

--Weakening of LVLT's operating profile, as signaled by deteriorating margins and revenue erosion brought on by difficult economic conditions or competitive pressure;
--Discretionary management decisions including but not limited to execution of merger and acquisition activity that increases leverage beyond 5.5x in the absence of a credible de-leveraging plan.