OREANDA-NEWS. Fitch Ratings has assigned a 'BBB-' rating to Qwest Corporation's (QC) offering of senior unsecured notes due 2056. QC is an indirect wholly owned subsidiary of CenturyLink, Inc. (CenturyLink). Net proceeds from the offering, plus cash on hand, primarily will be used to retire at maturity QC's $235 million 8.375% notes due 2016. QC's and CenturyLink's Issuer Default Rating (IDR) is 'BB+' and the Rating Outlook is Stable.

KEY RATING DRIVERS

The following factors support QC's and CenturyLink's ratings:

--Fitch's ratings are based on the modestly revised expectation that CenturyLink will demonstrate improvement in its revenue profile in the latter part of 2016 (rather than for the full year). Fitch estimates revenues declined just under 1% in 2015;
--Near-term consolidated free cash flows (FCFs) have strengthened and were relatively healthy in 2015;
--Liquidity is expected to remain relatively strong over the rating horizon;
--QC's issue ratings are based on the relatively lower leverage of QC and its debt issues' senior position in the capital structure relative to CenturyLink's senior unsecured debt.

The following factors are embedded in QC's and 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.

In May 2014, a 24-month, $1 billion share repurchase program became effective and during the first nine months of 2015, $523 million of shares were repurchased. The company completed its 2014 share repurchase program in December 2015. Share repurchases are being funded primarily out of FCF. Fitch does not expect CenturyLink to issue debt for future share repurchases.

On a gross debt basis, CenturyLink's leverage for the latest 12 months (LTM) ended Sept. 30, 2015 was approximately 3.03x. Leverage has risen from the 2.84x and 2.95x posted in 2013 and 2014, respectively, given slight pressure on EBITDA from lower revenue generation in early 2015 and 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. QC's leverage totalled 2.13x for the LTM ended Sept. 30, 2015.

In 2015, Fitch estimates CenturyLink's FCF (defined as cash flow from operations less capital spending and dividends) was substantially similar to the $913 million generated in 2014. Expected FCF levels reflect capital spending within the company's guidance of approximately $2.8 billion for 2015 (lowered after the second quarter 2015 earnings from approximately $3 billion). FCF is expected to decline in 2016 mainly due to higher cash taxes following the anticipated depletion of federal NOLs by the end of 2015, partly offset by the extension of bonus depreciation. 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.

KEY ASSUMPTIONS
--Fitch assumes revenues were down less than 1% in 2015, and will grow in the very low single digits beginning in 2016. EBITDA margins in 2015 and 2016 are expected to decline slightly from the 38.8% recorded in 2014 as higher margin legacy revenues continue to decline.

--In 2015, Fitch estimates consolidated capital spending approximated $2.8 billion, down from approximately $3 billion spent in 2014. The company is anticipated to continue funding share repurchases with FCF in 2016.

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.
--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 $20.4 billion at Sept. 30, 2015. Financial flexibility is provided through a $2 billion revolving credit facility, which matures in December 2019. As of Sept. 30, 2015, there were no borrowings outstanding on the facility. CenturyLink also has a $160 million uncommitted revolving letter of credit facility.

Fitch believes CenturyLink has the financial flexibility to manage upcoming maturities due to its FCF and credit facilities. Pro forma for the QC refinancing, approximately $1.2 billion of debt matures in 2016. In 2017, 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 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.\