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Fitch Assigns 'BBB-' to Embarq Senior Notes & Bank Facility.

CHICAGO -- Fitch Ratings has assigned a 'BBB-' issuer default rating (IDR) to Embarq Corporation (Embarq). Fitch has also assigned a 'BBB-' rating to the proposed $3.1 billion senior unsecured credit facility and has assigned a 'BBB-' rating to the proposed issuance of three tranches of senior notes totaling approximately $4.5 billion. The Rating Outlook is Stable.

Additionally, Fitch has removed the ratings of Carolina Telephone & Telegraph Company (CT&T) and Sprint -- Florida, Inc. (SFL) from Rating Watch Negative. Fitch has assigned a 'BBB-' IDR to CT&T and SFL and has downgraded the rating assigned to CT&T's debentures to 'BBB-' from 'BBB+'. Fitch has downgraded the rating assigned to SFL's first mortgage bonds to 'BBB' from 'A-'. The Rating Outlook for all the ratings assigned to CT&T and SFL is Stable.

Embarq is a direct wholly owned subsidiary of Sprint Nextel Corporation (Sprint Nextel) and was created to facilitate the contemplated spin-off of Sprint Nextel's local telephone division and its North Supply business to Sprint Nextel shareholders. To affect the spin-off approximately $2.1 billion of cash proceeds drawn from Embarq's credit facility together with the $4.5 billion of senior notes are expected to be transferred to Sprint Nextel. Following the spin-off from Sprint Nextel, Embarq will be the fifth largest local telephone company and the largest independent non-RBOC in the United States. Embarq will offer telecommunications services to approximately 4.5% of U.S. households. As of the end of 2005 Embarq had approximately 7.35 million total access lines along with approximately 693,000 DSL lines in 18 states including large clusters located in Florida, North Carolina, Nevada and Ohio.

Fitch's ratings reflect the size and scale of Embarq as well as the company's relatively stable cash flows and strong liquidity profile. Access to liquidity is provided by the $1.5 billion revolver, which will be in place until 2011. Fitch expects approximately $1.0 billion of borrowing availability following the completion of the spin-off. Additionally, Embarq's liquidity position is supported by the nominal amount of scheduled maturities over the next five years. The ratings also incorporate Embarq's diverse service territory, which includes a mixture of small urban, regional commerce, and rural markets that in Fitch's opinion have favorable demographic profiles. Primarily due to the geographic diversity Embarq's operating profile, from Fitch's perspective, has less overall risk and provides a buffer to competition and technology substitution relative to the more urban focused operating profiles of the regional bell operating companies (RBOCs).

Fitch's ratings recognize the ongoing pressure within Embarq's core voice services business stemming from technology substitution and broadband displacement. Fitch expects access lines losses as well as the erosion of core voice service revenue to continue for the foreseeable future as the wide scale launch of telephony service by the cable multiple system operators is expected to further elevate the competitive pressure within Embarq's service territory. By the end of 2006 a significant portion of households within Embarq's service territory will have access to a cable telephony service. The core voice services generate a large portion of the company's overall revenue base highlighting the lack of revenue and service diversity inherent in Embarq's current operating profile. Additionally, the ratings reflect the lack of growth opportunities available to Embarq to mitigate the expected erosion of voice service revenues. Fitch acknowledges that Embarq has experienced rapid growth from DSL, however Fitch believes the growth from DSL alone will not be sufficient to offset the expected declines in voice revenue.

Fitch believes that Embarq's credit protection metrics are appropriate within the rating category. Pro forma for the spin-off transaction as of Dec. 31, 2005, Embarq's outstanding indebtedness totaled $7.25 billion including approximately $665 million of legacy local telephone debt. Leverage on a debt to EBITDA basis, on a pro forma basis as of the end of 2005 was 2.5 times (x) while interest coverage was over 5.5x. Fitch anticipates leverage to remain relatively stable over the short term as Fitch expects nominal amounts of debt reduction to keep pace with the expected erosion of EBITDA. In Fitch's opinion the $300 million annual dividend Embarq expects to pay its shareholders affords the company with sufficient financial flexibility to invest in plant and growth opportunities balanced against Fitch's expectation of continued erosion of EBITDA and free cash flow. From Fitch's view point Embarq's dividend policy is within Fitch's investment grade expectations when balanced against lower overall leverage. Factors that could result in a negative rating action include but are not limited to an unfavorable change in the company's dividend policy and a greater than anticipated impact on access line losses from cable telephony.

The Stable Rating Outlook reflects Fitch's expectation that Embarq's credit protection metrics will be consistent over the next 12 to 24 months as well as Embarq's ability to generate relatively stable amounts of free cash flow. This expectation is balanced with the competitive operating environment stemming primarily from wireless substitution and competition from cable telephony service offerings. Fitch believes that a key strategy to mitigating competitive pressure is the company's service bundling offering. Embarq will enhance its service bundle with the expected launch of its wireless MVNO service. Fitch anticipates that Embarq's wireless business will be EBITDA dilutive over the near term. Fitch believes that a key to Embarq's service bundling strategy will be the level of integration the company is able to achieve between its wireline, wireless and video businesses.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Comment:Fitch Assigns 'BBB-' to Embarq Senior Notes & Bank Facility.
Publication:Business Wire
Geographic Code:1USA
Date:Apr 25, 2006
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