Fitch: CenturyLink's Rating Unaffected After Data Center Business Announcement
OREANDA-NEWS. According to Fitch Ratings, CenturyLink, Inc.'s (CenturyLink) 'BB+' Issuer Default Rating is not affected by the company's announcement yesterday that it is considering strategic alternatives for its data centers and colocation business operations.
CenturyLink's review encompasses a range of options, including a partnership or joint venture, the sale of all or a portion of the data centers, as well as keeping part or all of the assets. Should a sale take place, CenturyLink will continue to offer managed-IT and cloud-based services along with its enhanced network offerings. Colocation will also continue to be offered. The company said the ownership of the physical data center assets is not necessary for the provision of its strategic services and that capital spending in its core business can generate better returns than investments in data centers. The timing of the conclusion of the review is uncertain.
Fitch believes that if a sale of all or a part of the physical data center assets occurs, the effect on the company's operational profile will be minimal given the continued provision of strategic services to its enterprise customers. The company has not provided guidance on the use of any potential proceeds received. Fitch does not expect CenturyLink to change its net leverage target of approximately 3x, so while there may be some debt reduction in order to operate around its target, no delevering is expected. There may be no change in financial flexibility -- while CenturyLink would no longer incur data center related capital spending -- investments in other strategic areas, such as fiber, could increase.
KEY RATING DRIVERS
The following factors support 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 in 2016 (rather than for the full year). Fitch a decline of just under 1% in 2015;
--Near-term consolidated free cash flows (FCFs) have strengthened and are expected to be relatively healthy in 2015;
--Liquidity is expected to remain relatively strong over the rating horizon.
The following factors are embedded in 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, $541 million of shares were repurchased. As of Nov. 3, 2015, approximately $133 million was available under the 2014 share repurchase program. 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. 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.
In 2015, Fitch expects CenturyLink's FCF (defined as cash flow from operations less capital spending and dividends) to be substantially similar to the $913 million generated in 2014.
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 June 30, 2015 -- per CenturyLink's latest form 10-Q -- approximately $1.7 billion was available 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. Maturing debt in the remainder of 2015 is nominal. In 2016, maturities amount to approximately $1.4 billion.
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).
CenturyLink's ratings are as follows:
--Long-term IDR 'BB+';
--Senior unsecured $2 billion revolving credit facility 'BB+';
--Senior unsecured debt 'BB+'.
--Senior unsecured notes 'BBB-'.
Embarq Florida, Inc. (EFL)
--First mortgage bonds 'BBB-'.
Qwest Communications International, Inc. (QCII)
Qwest Corporation (QC)
--Senior unsecured notes 'BBB-'.
Qwest Services Corporation (QSC)
Qwest Capital Funding (QCF)
--Senior unsecured notes 'BB+'.