CHICAGO, Nov 07, 2011 (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
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SOURCE: Fitch Ratings
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
Copyright Business Wire 2011
