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Fitch Ratings Upgrades Qwest's IDR To 'BB'; Outlook Stable.

CHICAGO -- Fitch Ratings has upgraded the Issuer Default Rating (IDR) of Qwest Communications International, Inc. (Qwest) and its wholly owned subsidiaries Qwest Corporation (QC), Qwest Services Corporation (QSC), Qwest Capital Funding (QCF), and Qwest Communications Corporation (QCC) to 'BB' from 'B+'. In addition, Fitch has also upgraded the specific issue ratings assigned to the debt issued by Qwest and its subsidiaries, including upgrading the rating assigned to the senior unsecured debt issued by Qwest Corporation to 'BBB-' from 'BB+', as outlined below. The Rating Outlook is Stable for Qwest and its subsidiaries. Approximately $14.9 billion of debt as of the end of the 3Q'06 is affected by Fitch's actions.

Fitch's rating action recognizes the continuing strengthening of the company's credit profile stemming from operating margin improvement derived from ongoing cost reductions and productivity enhancements, rationalization of the company's network and less profitable products, the emergence and growth potential of IP based data products as well as the improvement to Qwest's balance sheet.

Overall the ratings assigned to Qwest and its subsidiaries incorporate the scope, scale and relatively stable cash flow generated by QC's local exchange business, the reduced cash requirements of Qwest's out of region businesses, and Fitch's expectation of continued credit metric improvement and generation of material free cash flow. Fitch's ratings also reflect the competitive pressure from ongoing product and technology substitution. Fitch anticipates that the operating environment within consumer markets will become more competitive as voice over IP telephony service becomes broadly available through cable multiple system operators. Fitch points out however that in several markets Qwest has competed for telephony subscribers with cable companies that offer legacy circuit switch telephone service for some time. The effects of competition manifest themselves through access line losses. Overall the pace of access line erosion has accelerated during 2006 with access line losses for the third quarter-2006 (3Q'06) of 6%. Fitch expects that during 2007 and 2008 competition from cable telephone providers will further accelerate access line losses.

Qwest's strategy to mitigate the competitive pressures within consumer markets centers on strengthening its product bundle. From Fitch's perspective, the strategy is gaining traction. Penetration of bundled products increased to 56% as of the end of the 3Q'06 reflecting an increase from 50% from the year earlier period. Qwest's Mass Market customer connections, a measurement of mass market access lines, high speed internet subscribers, video subscribers through the company's alliance with DIRECTV and wireless subscribers, increased 2.8% on a year over year basis during the 3Q'06. The bundled service strategy positions the company to offset the revenue lost by access line erosion. As of the end of the third quarter, Qwest was able to expand its consumer ARPU to $50.07 reflecting a 7.3% year over year growth rate and grow Mass Market revenues 3.5% on a year over year basis while Mass Market access lines declined by 5.4%. Qwest's ability to grow its revenue base will, in Fitch's opinion, be predicated on the company's ability to drive further bundled service penetration, grow the ARPU of growth products and continue to migrate its enterprise customer base to more advanced data services. Fitch expects that over the current ratings horizon Qwest's service bundling strategy will offset much of the revenue loss associated with access line losses.

Since the end of 2002, Qwest has reduced outstanding debt by nearly $8 billion and improved leverage from 5.4 times (x) to 3.4x as of the LTM period ended Sept. 30, 2006. The improvement was largely attributable to a significant turn around in Qwest's ability to generate free cash flow and management's use of free cash flow generation to reduce debt. Fitch believes that Qwest's credit profile will continue to improve during the ratings horizon with leverage declining modestly to under 3.3x by year-end (YE) 2007 and approaching 3.1x by YE 2008.

In Fitch's opinion, Qwest's liquidity position is strong and is supported by existing cash and short term investments totaling approximately $1.2 billion, the $850 million senior secured revolver as well as Fitch's expectation that the company will continue to generate stable levels of free cash flow. Scheduled maturities of debt during 2007 and 2008 total approximately $1 billion, which Fitch expects that Qwest will retire with cash. Qwest expects to generate free cash flow ranging between $1.35 and $1.5 billion during 2006 and Fitch expects the company to generate free cash flow of approximately $1.6 billion during 2007 and 2008. From Fitch's perspective free cash flow growth will be limited to Qwest's ability to drive further margin improvements as the prospects of revenue growth is muted by competitive pressures. The ongoing Department of Justice investigation and pending shareholder lawsuits pose a potentially significant contingent liability to Qwest's liquidity profile. However given the level of near term expected free cash flow generation, Fitch believes that the company has adequate financial flexibility to address potential judgments and settlements.

Qwest has announced a $2 billion stock repurchase program that will be executed over the next two years. From Fitch's perspective, the share repurchase program will not have a material negative impact the company's financial flexibility. Importantly, Fitch expects that the company will fund the program with a combination of existing cash and expected free cash flow generation. Fitch estimates that the stock repurchase program represents approximately 49% of Qwest's existing cash and expected free cash flow generation over the next two years.

Given the free cash flow expectations of Qwest, Fitch anticipates that the pressure to increase the level of shareholder friendly actions will be an over hang on Qwest's credit profile over the ratings horizon. However, the amount of stock repurchases and other shareholder friendly actions is limited by restricted payment covenants contained in Qwest's debt indentures and credit facility. The credit facility limits restricted payments to net income (as of Jan. 1, 2006) plus $1.7 billion. Based on this restriction, Fitch estimates that Qwest's restricted payment basket is approximately $2.1 billion. The restricted payment covenants included in the Qwest notes are less restrictive and Fitch estimates that the restricted payment basket under the Qwest indentures is approximately $6 billion.

The Stable Rating Outlook reflects Fitch's expectation for continued stabilization of the company's revenue base driven by further strengthening of Qwest's service bundling strategy and investment in growth products such as high speed internet and advanced data products. The stable revenue base coupled with anticipated improvement in operating margins should in Fitch's opinion yield relatively stable generation of free cash flow and continue improvement of the company's key credit protection measures.

Fitch has upgraded the following ratings of Qwest and its subsidiaries:

Qwest Communications International, Inc.

--Issuer Default Rating (IDR) to 'BB' from 'B+';

--Senior secured credit facility to 'BBB-' from 'BB+';

--Senior unsecured notes (guaranteed by QSC) to 'BB+' from 'BB';

--Senior unsecured notes to 'BB' from 'B+'

Qwest Corporation

--Issuer Default Rating (IDR) to 'BB' from 'B+';

--Senior term loan to 'BBB-' from 'BB+';

--Senior unsecured notes to 'BBB-' from 'BB+'.

Qwest Services Corporation

--Issuer Default Rating (IDR) to 'BB' from 'B+';

--Senior subordinated to 'BB+' from 'BB'.

Qwest Capital Funding

--Issuer Default Rating (IDR) to 'BB' from 'B+';

--Senior unsecured notes to 'BB' from 'B+'.

Qwest Communications Corporation

--Issuer Default Rating (IDR) to 'BB' from 'B+';

--Senior unsecured notes to 'BB' from 'B+'.

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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Date:Nov 6, 2006
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