S&P Affirms Ratings on CenturyLink (CTL) Amid Level 3 Deal; Outlook Remains Stable

October 31, 2016 3:18 PM EDT

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S&P Global Ratings today said it affirmed its 'BB' long-term corporate credit rating and 'B' short-term corporate credit rating on CenturyLink Inc. (NYSE: CTL). The outlook is stable.

CenturyLink plans to finance the $24 billion purchase price with 60% equity and 40% cash and new debt. We expect the company will issue about $7 billion of new secured debt at the parent company and will use proceeds from the sale of its data center business to fund the cash portion. It will also issue another $1.2 billion of secured debt to refinance upcoming maturities and will put in place a $2 billion senior secured revolving credit facility.

At the same time, we placed our rating on CenturyLink's senior unsecured debt on CreditWatch with negative implications and our rating on wholly-owned subsidiary Embarq Corp.'s senior unsecured debt on CreditWatch with positive implications.

"The rating affirmation is based on our favorable view of the combined business, which is offset by the high pro forma leverage of about 4.4x (S&P Global-adjusted) based on the purchase price," said S&P Global Ratings credit analyst Allyn Arden.

Key business benefits include increased economies of scale from the combined business, a larger domestic and global reach to better service enterprise customers, and the enhancement of CenturyLink's product portfolio to better serve the enterprise market. Additionally, the combination of Level 3's dense metro and long-haul fiber assets and CenturyLink's local market facilities should offer meaningful operating synergies and improved coverage. Our more favorable business risk assessment also incorporates the increased mix of business customers to 75% of total revenue from 62% and reduced exposure to the highly competitive residential market because Level 3's base of business is almost entirely commercial customers. We believe that large enterprise customers are less likely to churn than consumers or small business clients. Moreover, we believe the purchase of Level 3 will alleviate potential regulatory risk at CenturyLink associated with the FCC's proposed special access reform, which could result in lower revenue from the sale of business data service lines to customers, since Level 3 is a competitive telecom provider and a net buyer of special access circuits.

The stable outlook reflects our expectation for relatively limited integration risk despite elevated leverage near term. We expect CenturyLink's revenue on a standalone basis to decline in the low-single-digit percent area in 2016 due to ongoing residential access line losses and lower revenue in the SMB market, which is nearly offset by growth from strategic services, including the company's fiber-based Prism TV service and high bandwidth based services for larger enterprise customers.



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