S&P Upgrades Level 3 Communications (LVLT) to 'BB'; Outlook Stable

S&P Global Ratings said that it raised its corporate credit rating on Level 3 Communications Inc. (NYSE: LVLT) to 'BB' from 'BB-'. The rating outlook is stable.

At the same time, we raised our issue-level rating on Level 3's senior secured debt at wholly owned subsidiary Level 3 Financing Inc. to 'BB+' from 'BB'. The recovery rating on this debt remains '2', which indicates our expectation for substantial (70%-90%; upper half of the range) recovery of principal in the event of a payment default.

We also raised our issue-level rating on the company's unsecured debt, including the unsecured notes at wholly owned subsidiary, to 'B+' from 'B'. The recovery rating on this debt remains '6', which indicates our expectation for negligible (0%-10%) recovery of principal in the event of a payment default.

"The upgrade reflects Level 3's solid operating and financial performance, which has resulted in improved credit metrics. Adjusted debt to EBITDA declined to about 3.9x as of March 31, 2016, from around 4.8x a year earlier due to EBITDA growth," said S&P Global Ratings credit analyst Scott Tan. "Moreover, we expect that leverage will continue to improve over the next year such that it remains below 4x, based on the company's stated leverage target of 3x-4x."

The stable rating outlook reflects our expectation that the company will continue to grow revenue and EBITDA over the next year from customer growth and the upselling of its existing customer base to new IP-based telecommunications products and services, as well as cost synergies from the TW Telecom acquisition, such that adjusted leverage remains below 4x on a sustained basis.

We could lower our corporate credit rating on Level 3 if weaker economic conditions or increased competition leads to higher churn and pricing pressure that causes core revenue declines, such that adjusted leverage rises above 4x on a sustained basis. We could also lower the rating if the company pursues a more aggressive financial policy, resulting in leverage above the 4x area.

An upgrade is highly unlikely, given the company's stated financial policy, which includes a net leverage target in the 3x-4x range. Level 3 would need to maintain adjusted leverage in the high-2x area on a sustained basis for us to consider an upgrade. We could also raise the rating if the company increases its market share, grow revenues in the high-single-digit percentage area, and improve EBITDA margins to around the 40% area.

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