Market Overview

Fitch Rates Level 3 Financing's Senior Notes 'BB-/RR2'

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'BB-/RR2' issue rating to Level 3 Financing, Inc.'s (Level 3 Financing) proposed $350 million issuance of senior notes due 2020. Level 3 Financing is a wholly owned subsidiary of Level 3 Communications, Inc. (LVLT). Fitch's Issuer Default Rating (IDR) for both LVLT and Level 3 Financing is 'B' with a Positive Rating Outlook.

The notes will rank pari passu with Level 3 Financing's existing senior unsecured indebtedness. Proceeds from the notes will be used primarily to redeem a portion of Level 3 Financing's 9.25% senior notes due 2014. LVLT had approximately $8.5 billion of debt outstanding on a pro forma basis considering the close of the Global Crossing Limited (GLBC) acquisition and capital market activity since Sept. 30, 2011.

Fitch believes the issuance is positive for the company's credit profile as LVLT continues to address the refinancing risk associated with its 2014 scheduled maturities. After considering the $280 million pre-payment of LVLT Financing's Tranche B Term Loan and today's contemplated issuance, approximately $1.9 billion ($2.5 billion actual as of Sept. 30, 2011) of debt is scheduled to mature during 2014. Outside of the extension of the company's maturity profile, LVLT's credit profile has not substantially changed.

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. LVLT does not have any significant maturities scheduled during 2012 and 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 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 acquisition accelerates LVLT's progress in achieving its target leverage ratio of 3.0x to 5.0x.

The Positive 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.

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.

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:

Rating Global Telecoms Companies - Sector Credit Factors

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

Corporate Rating Methodology

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

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
Email: brian.bertsch@fitchratings.com

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