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Moody's downgrades CenturyLink's CFR to Ba2; outlook stable.

New York: Moody's Investors Service ("Moody's") has downgraded CenturyLink, Inc.'s ("CenturyLink" or "the company") Corporate Family Rating ("CFR") to Ba2 from Ba1 and downgraded its senior unsecured debt rating to Ba3 from Ba2. The senior unsecured ratings of Qwest Corporation and Embarq Corporation were downgraded to Ba1 from Baa3 while the ratings of all other subsidiaries were also downgraded by one notch. As part of the rating action, Moody's lowered the Speculative Grade Liquidity rating to SGL-3 from SGL-2 reflecting adequate liquidity amidst a sizable $1.18 billion of Embarq Corp notes maturing in June 2016, which the company expects to address with a combination of new debt issued at the CenturyLink parent level and utilizing its $2 billion credit facility. The outlook for all ratings is stable.

The downgrade reflects the challenges CenturyLink faces in preserving a balance sheet consistent with a higher rating given downward pressure on revenues and cash flows due to the secular decline of the wireline business, lower-margin strategic services replacing higher-margin legacy revenues, and growing competition. In addition, cash taxes will increase significantly in 2016 and beyond and will likely preclude the company from generating significant free cash flow after 2017 unless the business shows a dramatic improvement in its revenue and EBITDA profile. The expectation for significantly diminished cash flow in 2017 and 2018 is based on existing tax law including the recent 5 year extension of bonus depreciation.

If a full or partial sale of its data centers and colocation business operations is realized, we do not expect 100% of the net proceeds to be used for debt pay down, which is the only way CenturyLink could reduce its leverage to levels consistent with its prior Ba1 CFR.

Our current projections do not include any sizeable new share repurchase programs but do include a relatively modest share repurchase to offset the dilutive effects on EPS if the data center sale is consummated. Because we expect a steady increase in cash taxes (absent corporate tax reform) and limited EBITDA growth, we believe that CenturyLink will need to issue debt to finance any future share repurchase programs.

Moody's has taken the following rating actions:

CenturyLink, Inc.

..Corporate Family Rating: Downgraded to Ba2, from Ba1

..Probability of Default Rating: Downgraded to Ba2-PD, from Ba1-PD

..Speculative Grade Liquidity Rating: Lowered to SGL-3, from SGL-2

..Senior Unsecured Regular Bond/Debenture: Downgraded to Ba3 (LGD5), from Ba2 (LGD5)

..Outlook: Stable, from Negative

Qwest Corporation

..Senior Unsecured Regular Bond/Debenture: Downgraded to Ba1 (LGD3), from Baa3 (LGD3)

..Senior Unsecured Shelf: Downgraded to (P)Ba1, from (P)Baa3

..Outlook: Stable, from Negative

Embarq Corporation

..Senior Unsecured Regular Bond/Debenture: Downgraded to Ba1 (LGD3), from Baa3 (LGD3)

..Outlook: Stable, from Negative

Centel Capital Corp.

..Senior Unsecured Regular Bond/Debenture: Downgraded to Ba1 (LGD3), from Baa3 (LGD3)

..Outlook: Stable, from Negative

Embarq Florida, Inc.

..Senior Secured First Mortgage Bonds: Downgraded to Baa3 (LGD2), from Baa2 (LGD2)

..Outlook: Stable, from Negative

Mountain States Telephone & Telegraph Co.

..Senior Unsecured Regular Bond/Debenture: Downgraded to Ba1, from Baa3

..Outlook: Stable, from Negative

Northwestern Bell Telephone Company

..Senior Unsecured Regular Bond/Debenture: Downgraded to Ba1, from Baa3

..Outlook: Stable, from Negative

RATINGS RATIONALE

CenturyLink's Ba2 Corporate Family Rating reflects the company's predictable cash flows, its broad base of operations, and a still strong market position, especially in its fiber-enabled large markets. These positives are offset by the challenges the company faces in reversing the downward pressure on revenues and EBITDA margins due to competitive forces and secular changes in the industry. Management's growing tolerance for higher leverage as evidenced by its recent preference to use the vast majority of its excess cash flow for share repurchases also weighs on the rating. Consequently, credit protection measurements (i.e. debt to EBITDA) are expected to trend towards 3.6x (Moody's adjusted) by FYE2016 and potentially increase thereafter if cash taxes rise meaningfully, as currently expected.

Moody's expects CenturyLink to have an adequate liquidity profile over the next twelve months, reflecting the Speculative Grade Liquidity ("SGL") rating of SGL-3. At the end of 4Q'15, CenturyLink had $126 million in cash and about $1.67 billion available under its credit facility. For 2016, we expect CenturyLink to generate about $4.7 billion in cash flow from operations (Moody's adjusted) while investing about $3.4 billion (Moody's adjusted) in its network and paying dividends of about $1.2 billion, resulting in about $150 million of free cash flow. The company has about $1.4 billion of debt maturing throughout 2016. During January 2016, the company completed a $235 million debt issuance of Qwest Corp notes that will be used to refinance the upcoming $235 million Qwest Corp notes maturity on May 1, 2016. CenturyLink has stated that the company will be opportunistic in refinancing some or all of the $1.18 billion Embarq Corp notes maturing June 1, 2016 at the CenturyLink parent level. And, if needed, the company currently has the revolver capacity to handle the June 1 maturity. With the share repurchase program completed in December 2015, the company could also use available free cash flow for a portion of the maturity.

CenturyLink's senior unsecured rating of Ba3 (LGD5) reflects its junior position in the capital structure and the significant amount of senior debt that is likely to remain outstanding at Qwest Corporation. CenturyLink's credit facility is not rated, but has structural seniority provided by subsidiary guarantees.

The senior unsecured debt of Qwest Corporation, the company's largest operating subsidiary, is rated Ba1 (LGD3) based on its structural seniority and relatively low leverage of 2.0 times Debt to EBITDA (Moody's adjusted) as of LTM September 31, 2015. We note that CenturyLink plans to refinance maturing debt at Qwest Corporation at this entity. Consequently, leverage at Qwest Corporation could increase over the next few years, since we expect its EBITDA to face pressure.

The senior unsecured debt of Qwest Capital Funding, Inc. ("QCFI"), which is guaranteed by Qwest Communications International, Inc., are unrated due to the lack of QCII audited financial statements and no guarantees provided by CenturyLink. QCFI has an intermediate position in the capital structure between Qwest Corporation and CenturyLink, Inc.

The senior unsecured debt of Embarq Corporation ("Embarq") is rated Ba1 (LGD3). CenturyLink has indicated that it plans to refinance debt that matures at this entity at the parent company level (CenturyLink, Inc.). Consequently, we expect leverage at Embarq Corporation to decline over time.

The senior secured debt of Embarq's operating subsidiary, Embarq Florida, Inc., is rated Baa3 (LGD2). These securities benefit from structural seniority and the pledge of assets of the operating companies. The senior unsecured debt of Centel Capital Corporation (guaranteed by its direct parent, Centel Corporation) is rated Ba1 (LGD3) and reflects its structural subordination to the secured debt of the subsidiaries of Centel Corporation, which include Embarq Florida.

The stable outlook reflects our belief that CenturyLink will remain in the 3.6x -- 3.75x range of leverage (Moody's adjusted) amidst declines in revenue and EBITDA margins as lower-margin strategic revenue replaces higher-margin legacy revenue.

Moody's could raise CenturyLink's ratings if leverage (Moody's adjusted) were to be sustained below 3.4x 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 leverage (Moody's adjusted) were to exceed 3.8x or free cash flow turned negative on a sustained basis, or if capital investment were reduced to levels that would weaken the company's competitive position.

The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Apr 7, 2016
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