Market Overview

Fitch Rates Level 3 Financing Term Loan B III 'BB/RR1'; Outlook Positive

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'BB/RR1' rating to Level 3 Financing, Inc.'s $550 million term loan B III due 2018. Level 3 Financing is a wholly owned subsidiary of Level 3 Communications, Inc. (LVLT). The Issuer Default Rating (IDR) for both LVLT and Level 3 Financing is 'B' with a Positive Rating Outlook. The terms of the new term loan are expected to mirror those of the existing $2.23 billion senior secured credit facility (rated 'BB/RR1' by Fitch). Proceeds of the new term loan together with existing cash on hand are expected to be used to refinance the company's outstanding $280 million term loan B and LVLT's 3.5% convertible senior notes due 2012 which had $274 million principal outstanding as of Sept. 30, 2011. LVLT had approximately $8.55 billion of debt outstanding on a pro forma basis considering the close of the Global Crossing Limited (GLBC) acquisition.

From Fitch's perspective, the issuance enhances LVLT's financial flexibility by extending its maturity profile but will not materially change the company's overall credit profile or credit protection metrics. Fitch notes that senior secured debt constitutes approximately 30% of the company's debt structure after consideration of the new issuance and the financing related to the acquisition of GLBC versus 26% as of year end 2010. The increased proportion of secured debt weakens the recovery prospects of senior unsecured debt holders and has positioned the 'RR2' recovery rating assigned to Level 3 Financing's senior unsecured debt to the lower end of the recovery spectrum.

Fitch believes that LVLT's liquidity position is adequate given the rating and is primarily supported by cash carried on its balance sheet, which as of Sept. 30, 2011 totaled approximately $461 million and $921 million on a pro forma basis following the close of the GLBC acquisition. The company does not maintain a revolver and relies on capital market access to replenish cash reserves, which when combined with the lack of positive free cash flow generation limits the company's financial flexibility in Fitch's opinion. The new issuance will address the company's 2012 scheduled maturity totaling approximately $274 million. Fitch believes LVLT's cash position is sufficient to address 2013 maturities which total approximately $272 million while funding anticipated free cash flow deficits. LVLT's next significant maturity tower is in 2014 when approximately $2.5 billion of debt is scheduled to mature.

LVLT's ratings recognize, in part, the de-leveraging of the company's balance sheet resulting from its acquisition of GLBC. Pro forma for the acquisition and the current financing transaction, LVLT's leverage declines to 6.3 times (x) for the latest 12 month (LTM) period ended Sept. 30, 2011 compared with the company's actual leverage of 8.4x as of Sept. 30, 2011 and 7.5x as of Dec. 31, 2010. Moreover, based on the company's ability to realize anticipated operating cost synergies, the GLBC acquisition positions LVLT to further improve its credit profile and generate consistent levels of free cash flow. The transaction accelerates LVLT's progress in achieving its target leverage ratio of 3.0x to 5.0x.

The Positive Rating Outlook reflects Fitch's belief that LVLT's credit profile will strengthen as the company achieves the cost synergies associated with the GLBC acquisition. Fitch anticipates that LVLT's credit protection metrics during 2012 will remain relatively consistent with year end 2011 metrics as integration costs will largely offset positive operating momentum. Fitch expects LVLT's leverage as of year end 2011 (on a pro forma basis) will approximate 6.2x and dip below 6.2x as of year end 2012. Fitch expects to observe the strengthening of LVLT's credit metrics during 2013 as cost synergies begin to take effect.

From Fitch's perspective, the GLBC acquisition strengthens LVLT's competitive position. In addition to increasing LVLT's scale, the acquisition enhances the breadth and depth of LVLT's service offering and permits the company to expand into new markets. Importantly, the acquisition broadens the spectrum of customers LVLT serves including large multi-national enterprise customers. GLBC's network complements LVLT's existing network and the combined network positions LVLT as a global network operator enabling the company to expand existing customer relationships and capture new customer opportunities.

Achievement of expected cost synergies is reasonable from Fitch's viewpoint. LVLT anticipates the transaction will yield annualized cost synergies of approximately $340 million including annualized capital expenditure reduction of $40 million. Over 50% of the expected cost synergies are coming from network expense and capital expense savings. Fitch anticipates that network cost synergies will be realized as GLBC network traffic is migrated to LVLT's network and the company leverages the collective 'on-net' footprint to reduce third-party network access costs. Additional cost synergies will be realized as LVLT rationalizes its combined network and eliminates duplicate circuits. LVLT expects to achieve two-thirds of the run rate cost synergies within 18 months of the closing of the transaction. The cost of synergies is expected to range between $200 million and $225 million, and half of the costs will be spent during the first year following the close of the transaction.

Fitch believes LVLT's ability to manage the integration process and limit the disruption to the company's overall operations is key to the success of the transaction. The integration of the networks is primarily focused on long haul assets. LVLT has a successful history of integrating long haul assets with the company's acquisition of Genuity, WilTel and the long haul portion of the Broadwing acquisition.

Positive rating actions will likely occur as the company demonstrates that it is successfully integrating GLBC without material disruption to its operations. Equal consideration will be given to the company's ability to attain cost synergies while maintaining positive operational momentum. Evidence of positive operating momentum includes stable to expanding gross margins and revenue growth within the company Core Network Services segment. Fitch would expect LVLT to be generating consistent positive free cash flow and reduce leverage to 5.5x before taking a positive rating action.

A stabilization of the Rating Outlook at the current rating level would coincide with LVLT experiencing difficulty or delay in fully integrating GLBC and achieving anticipated cost synergies. A weakening of LVLT's operating profile, as signaled by deteriorating margins and revenue erosion brought on by difficult economic conditions or competitive pressure will likely lead to negative rating action.

Overall, Fitch's ratings incorporate LVLT's highly levered balance sheet, its weaker competitive position and lack of scale relative to larger and better capitalized market participants. The ratings for LVLT reflect the company's strong metropolitan network facilities position relative to alternative carriers, as well as the diversity of its customer base and service offering, and a relatively stable pricing environment for a significant portion of LVLT's service portfolio.

Based largely on LVLT's strategy to invest in metropolitan facilities and carry more communications traffic on its network, the company derives strong operating leverage from its cost structure and network, enabling it to enhance margins and rapidly increase cash flows once revenue growth returns. Additionally, Fitch expects that the company can further strengthen its operating leverage as it continues to migrate its revenue mix to more margin rich data services and away from lower margin voice services.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Rating Global Telecoms Companies' (Sept. 16, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating Global Telecoms Companies - Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.

Fitch Ratings
Primary Analyst
David Peterson, +1-312-368-3177
Senior Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore, +1-312-368-3125
Senior Director
or
Committee Chairperson
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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