Moody's Lowers Outlook on CenturyLink (CTL) to Negative
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Moody's Investors Service ("Moody's) has changed CenturyLink, Inc.'s (NYSE: CTL) rating outlook to negative following the announcement that CenturyLink's board has authorized an additional share repurchase program of up to an aggregate $1 billion of the Company's outstanding common stock over the next two years. The new share repurchase program shall begin when the current share repurchase program is completed, which is expected during the second quarter of 2014 based on current market conditions. The change in outlook reflects Moody's belief that CenturyLink is changing its stance on its prior commitment to use some portion of excess free cash flow for debt reduction. Furthermore, the Company is exhibiting a tolerance for even higher leverage than their current stated target of no greater than 3.0 times Debt to EBITDA. All of CenturyLink's existing ratings, including all rated subsidiaries, have been affirmed.
Moody's has taken the following rating actions:
CenturyLink, Inc.
..Outlook: Negative, from Stable
Qwest Corporation
..Outlook: Negative, from Stable
Mountain States Telephone & Telegraph Co.
..Outlook: Negative, from Stable
Northwestern Bell Telephone Company
..Outlook: Negative, from Stable
Embarq Corporation
..Outlook: Negative, from Stable
Centel Capital Corp.
..Outlook: Negative, from Stable
Embarq Florida, Inc.
..Outlook: Negative, from Stable
United Telephone Co. of Pennsylvania
..Outlook: Negative, from Stable
RATINGS RATIONALE
Since the inception of CenturyLink's $2 billion share repurchase program in February 2013 through February 11, 2014, the Company has repurchased 50.8 million shares for $1.72 billion, an accelerated pace well above Moody's initial expectations. CenturyLink expects to complete the remainder of the current share repurchase program during the second quarter of 2014. The announcement of an additional $1 billion share repurchase program and our expectation for CenturyLink's cash taxes to considerably increase in 2015 echo our concern that leverage may slightly increase while debt levels decrease a negligible amount over time.
The negative outlook reflects Moody's view that CenturyLink will continue to use the majority of its generated free cash flow towards share repurchases rather than debt reduction and reflects our concern of a tolerance for higher leverage. Assuming the Company fully completes its new share repurchase program, we expect leverage (Moody's adjusted) to remain below 3.4x over the next 3 years, the trigger for a ratings downgrade. However, by FYE 2016, we expect the Company will remain only slightly below the cusp of 3.4x. If the new share repurchase plan is accelerated at a considerable pace, it would likely result in negative ratings implications due to a more aggressive financial policy.
CenturyLink's Ba1 corporate family rating reflects the company's predictable cash flows, its broad base of operations, and its strong market position. These positives are offset by the challenges the company faces in reversing the downward pressure on revenues and sustaining EBITDA margins exacerbated by a tolerance for higher leverage as well as management's inclination to use a majority of its excess cash flow towards additional share repurchases rather than debt reduction.
Although unlikely given the Company's new share repurchase program and current leverage target, Moody's could raise CenturyLink's ratings if leverage were to be sustained below 3.0x (Debt / EBITDA, Moody's adjusted) and free cash flow to debt were in the high single digits. More importantly, we would need evidence that management is committed to a more conservative financial policy.
Moody's could lower the ratings further if one of the following occurs: a) leverage (Debt / EBITDA, Moody's adjusted) were to exceed 3.4x or free cash flow to debt fell below 5% on a sustained basis; b) management were to signal further tolerance of additional financial leverage; c) the share repurchase program was accelerated, resulting in a likely increase of debt and/or strain on liquidity.
The principal methodology used in this rating was the Global Telecommunications Industry Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Moody's has taken the following rating actions:
CenturyLink, Inc.
..Outlook: Negative, from Stable
Qwest Corporation
..Outlook: Negative, from Stable
Mountain States Telephone & Telegraph Co.
..Outlook: Negative, from Stable
Northwestern Bell Telephone Company
..Outlook: Negative, from Stable
Embarq Corporation
..Outlook: Negative, from Stable
Centel Capital Corp.
..Outlook: Negative, from Stable
Embarq Florida, Inc.
..Outlook: Negative, from Stable
United Telephone Co. of Pennsylvania
..Outlook: Negative, from Stable
RATINGS RATIONALE
Since the inception of CenturyLink's $2 billion share repurchase program in February 2013 through February 11, 2014, the Company has repurchased 50.8 million shares for $1.72 billion, an accelerated pace well above Moody's initial expectations. CenturyLink expects to complete the remainder of the current share repurchase program during the second quarter of 2014. The announcement of an additional $1 billion share repurchase program and our expectation for CenturyLink's cash taxes to considerably increase in 2015 echo our concern that leverage may slightly increase while debt levels decrease a negligible amount over time.
The negative outlook reflects Moody's view that CenturyLink will continue to use the majority of its generated free cash flow towards share repurchases rather than debt reduction and reflects our concern of a tolerance for higher leverage. Assuming the Company fully completes its new share repurchase program, we expect leverage (Moody's adjusted) to remain below 3.4x over the next 3 years, the trigger for a ratings downgrade. However, by FYE 2016, we expect the Company will remain only slightly below the cusp of 3.4x. If the new share repurchase plan is accelerated at a considerable pace, it would likely result in negative ratings implications due to a more aggressive financial policy.
CenturyLink's Ba1 corporate family rating reflects the company's predictable cash flows, its broad base of operations, and its strong market position. These positives are offset by the challenges the company faces in reversing the downward pressure on revenues and sustaining EBITDA margins exacerbated by a tolerance for higher leverage as well as management's inclination to use a majority of its excess cash flow towards additional share repurchases rather than debt reduction.
Although unlikely given the Company's new share repurchase program and current leverage target, Moody's could raise CenturyLink's ratings if leverage were to be sustained below 3.0x (Debt / EBITDA, Moody's adjusted) and free cash flow to debt were in the high single digits. More importantly, we would need evidence that management is committed to a more conservative financial policy.
Moody's could lower the ratings further if one of the following occurs: a) leverage (Debt / EBITDA, Moody's adjusted) were to exceed 3.4x or free cash flow to debt fell below 5% on a sustained basis; b) management were to signal further tolerance of additional financial leverage; c) the share repurchase program was accelerated, resulting in a likely increase of debt and/or strain on liquidity.
The principal methodology used in this rating was the Global Telecommunications Industry Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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