CenturyLink, Inc. — Moody's assigns Ba3 to CenturyLink's proposed senior unsecured notes
Rating Action: Moody’s assigns Ba3 to CenturyLink’s proposed senior unsecured notes
Global Credit Research – 07 Aug 2020
New York, August 07, 2020 — Moody’s Investors Service (Moody’s) has assigned a Ba3 to CenturyLink, Inc.’s (CenturyLink) proposed $840 million senior unsecured notes due 2029 (Unsecured Notes) which will be issued by Level 3 Financing, Inc. (LFI). The net proceeds from the sale of the Unsecured Notes, together with cash on hand, will be used to pay down the 5.625% senior notes due 2023 and the 5.125% senior notes due 2023 as well as for general corporate purposes. All other ratings including the company’s Ba3 corporate family rating (CFR) and stable outlook are unchanged.
Assignments:
..Issuer: Level 3 Financing, Inc.
….Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD4)
RATINGS RATIONALE
CenturyLink’s Ba3 CFR reflects its predictable and further enhanced cash flow from its 2019 dividend reduction, its broad base of operations and strong market position. The company’s publicly stated financial policy focuses on the longer term achievement of a company-calculated net debt to adjusted EBITDA range of 2.75x to 3.25x, with steady debt reductions over at least the next two years funded with discretionary free cash flow. In addition, CenturyLink’s continuing record of consistent network investment at a level generally above its peer group average demonstrates its commitment to its long term competitive position. These positives are offset by still high but declining leverage and revenue weakness across its business units, exacerbated by secular industry challenges and a highly competitive operating environment. Revenue contracted 3.4% in the second quarter of 2020 compared to the same period in the prior year, but this revenue contraction has steadily diminished from higher levels over the last five quarters.
CenturyLink has demonstrated strong cost cutting success at a faster than planned pace from initial synergy targets following its November 2017 acquisition of Level 3, significantly offsetting the impact of revenue weakness on operating margins. CenturyLink’s company-calculated adjusted EBITDA margin for Q2 2020 decreased slightly to 41.9% compared to the same period a year ago. However, company-calculated adjusted EBITDA margins have been steadily increasing since the close of the Level 3 acquisition and are up almost 650 basis points from a pre-close third quarter 2017 level of 35.5%. With Moody’s expectation for EBITDA margins to continue increasing on an annual basis along with increased free cash flow from the 2019 dividend cut, CenturyLink is now well-positioned to pay down about $2 billion of debt each year through year-end 2022. As of June 30, 2020, CenturyLink’s leverage (Moody’s adjusted) was approximately 4.1x.
Moody’s expects CenturyLink to have a good liquidity profile over the next 12 months, reflected by its SGL-2 speculative grade liquidity rating and supported by $1.8 billion cash on hand as of June 30, 2020, and our expectation of at least $2.1 billion of after dividend free cash flow for full year 2020. The company had approximately $2.9 billion of near term debt maturities as of June 30, 2020.
CenturyLink also has $1.125 billion of availability under its $2.2 billion senior secured revolving credit facility that expires in January 2025. With respect to the term loan A facilities and the revolver, the credit agreement requires CenturyLink to maintain a total leverage ratio of not more than 4.75x and a minimum consolidated interest coverage ratio of at least 2x. The term loan B facility is not subject to the leverage or interest coverage covenants. We estimate CenturyLink will remain comfortably in compliance with the total leverage ratio and interest coverage ratio for the next 12 to 18 months
The instrument ratings reflect both the probability of default of CenturyLink, as reflected in the Ba3-PD probability of default rating, an average expected family recovery rate of 50% at default and the loss given default (LGD) assessment of the debt instruments in the capital structure based on a priority of claims.
CenturyLink’s corporate structure includes two layers of debt (secured/unsecured) at the holding company (CenturyLink, Inc.) level and three main operating company credit pools (Qwest Corporation, Embarq Corporation and Level 3 Parent, LLC) with multiple classes of debt within each.
At the holding company level, Moody’s rates the company’s secured credit facility Ba3 and unsecured notes B2. CenturyLink’s senior secured credit facilities, including its revolver and term loans, are rated Ba3, reflecting their senior position ahead of CenturyLink’s unsecured debt. The senior secured credit facilities are guaranteed by Wildcat Holdco LLC (Parent of Level 3 Parent, LLC), Qwest Communications International Inc. (QCII), Qwest Services Corp. (QSC), Qwest Capital Funding, Inc. (QCF) and Embarq Corporation (Embarq). The credit facility also benefits from a pledge of stock of Wildcat Holdco LLC, QCF and QSC. The B2 senior unsecured rating of CenturyLink Inc. reflects its junior position in the capital structure and the significant amount of senior debt, including as of June 30, 2020 $8.8 billion of debt at CenturyLink, $11.3 billion of debt at Level 3, $4.8 billion of debt at Qwest Corporation (QC), $0.4 billion of debt at QCF, and $1.6 billion of debt at Embarq and its subsidiaries. The senior unsecured debt of QC is rated Ba2 based on its structural seniority and relatively low leverage of 1.4x (Moody’s adjusted) as of March 31, 2020.
The senior unsecured notes of Level 3 Financing, Inc. (LFI) are rated Ba3, reflecting their structural seniority to Level 3 Parent, LLC, and junior position relative to LFI’s senior secured bank credit facility and senior secured notes which are rated Ba1. Leverage within the Level 3 credit pool was approximately 3.8x (Moody’s adjusted) as of June 30, 2020.
The senior unsecured debt of Embarq Corporation (Embarq) is rated Ba2, reflecting a structurally senior (relative to CenturyLink) claim on the assets of Embarq, which had leverage of 1.0x (Moody’s adjusted) as of March 31, 2020. The senior secured debt of Embarq’s operating subsidiary, Embarq Florida, Inc., is rated Baa3.
The stable outlook reflects CenturyLink’s sustainable deleveraging trajectory following an early 2019 dividend reduction, continued strong execution on cost synergies since the Level 3 acquisition in November 2017 and solid opportunities for continuing transformational synergies over the next several years. Moody’s expects that CenturyLink’s leverage (Moody’s adjusted) will steadily fall below 4.0x by year-end 2020, supported by solid operational execution and continued margin expansion despite continued secular pressures on top line growth, with excess cash flow dedicated to debt reduction.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:
Moody’s could downgrade CenturyLink’s CFR to B1 if leverage (Moody’s adjusted) increases above 4.25x or free cash flow turns negative, both on a sustained basis, or if capital investment is reduced to levels that could weaken the company’s competitive position. A sustained reversal in the currently declining pace of revenue contraction could also result in a downgrade.
Moody’s could upgrade CenturyLink’s CFR to Ba2 if both revenue and EBITDA were stabilized, leverage (Moody’s adjusted) was sustained below 3.75x and free cash flow to debt was in the high single digit percentage range.
The principal methodology used in this rating was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/research/Telecommunications-Service-Providers–PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
CenturyLink, Inc., headquartered in Monroe, Louisiana, is an integrated communications company that provides an array of communications services to residential, business, governmental and wholesale customers. In October of 2017, CenturyLink acquired Level 3 Parent, LLC, (f/k/a Level 3 Communications, Inc.) an international communications company with one of the world’s largest long haul communications and optical internet backbones. The company generated approximately $22.0 billion in revenue over the last 12 months ended June 30, 2020.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Neil Mack, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY’S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS,ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
MOODY’S CREDIT RATINGS,ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY’S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY’S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody’s investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody’s Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody’s Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
