Welcome!

News Feed Item

Fitch Affirms Level 3 Communications' IDR at 'B+'; Outlook Revised to Positive

Fitch Ratings has affirmed the 'B+' Issuer Default Rating (IDR) assigned to Level 3 Communications, Inc. (LVLT) and its wholly owned subsidiary Level 3 Financing, Inc. (Level 3 Financing). In addition Fitch has affirmed the specific issue ratings assigned to LVLT and Level 3 Financing as outlined at the end of this release. The Rating Outlook has been revised to Positive from Stable. Approximately $8.4 billion of LVLT's consolidated debt as of June 30, 2014 is affected by Fitch's actions.

Fitch Ratings expects to assign a rating to Level 3 Escrow II, Inc.'s (Level 3 Escrow) proposed $1 billion issuance of senior unsecured notes due 2022 once the conditions to release funds from escrow are satisfied and Level 3 Financing has assumed all obligations of Level 3 Escrow. Key conditions include, among others that the closing of the TW Telecom, Inc. is completed. Once released from escrow, proceeds from the issuance will be utilized to fund, in part, the cash consideration of LVLT's previously announced acquisition of TW Telecom, Inc. (TWTC). Overall LVLT expects to issue $3 billion of new debt which will be utilized to pay the cash consideration of the TWTC acquisition and repay outstanding TWTC indebtedness. Pro forma for the TWTC acquisition, Fitch estimates LVLT will have approximately $11.5 billion of debt. The transaction is subject to customary regulatory approvals including the FCC and other U.S. and state regulatory agencies. LVLT anticipates the transaction will close by year-end 2014.

KEY RATING DRIVERS

--The TW Telecom, Inc. (TWTC) acquisition increases LVLT's scale and focus on high margin enterprise account revenues while increasing the company's overall competitive position and ability to capture incremental market share;

--The acquisition is clearly in line with LVLT's strategy to shift its revenue and customer focus to become a predominantly enterprise-focused entity.

--LVLT remains committed to operate within its 3x to 5x net leverage target. The enhanced scale and ability to generate meaningful free cash flow (FCF) resulting from the transaction reinforces Fitch's expectation for further strengthening of LVLT's credit profile.

--The company is poised to generate sustainable levels of FCF (defined as cash flow from operations less capital expenditures and dividends). Fitch anticipates LVLT FCF generation during 2014 will range between 4% and 4.5% of consolidated revenues on a stand-alone basis, growing to nearly 10% of revenues by year-end 2016 on a pro forma basis.

--The operating leverage inherent within LVLT's business model positions the company to expand both gross and EBITDA margins.

The TWTC acquisition is in line with LVLT's strategy to shift its revenue and customer focus to become a predominately enterprise-focused entity. TWTC's strong metropolitan network supports LVLT's overall strategy. Pro forma for the transaction LVLT's revenue from enterprise customers increases to 70% of total CNS revenue from 66%. From a regional perspective North America CNS revenue would increase to 78% of total CNS revenue, up from approximately 71%.

LVLT's network capabilities, in particular its strong metropolitan network, along with a broad product and service portfolio emphasizing IP-based infrastructure and managed services provide the company a solid base to grow its enterprise segment revenues. Fitch believes that revenue growth prospects within LVLT's CNS segment stand to benefit from the transition among enterprise customers from legacy time division multiplexing (TDM) communications infrastructure to Ethernet or IP VPN infrastructure based in internet protocol.

From a network standpoint the transaction combines a highly complementary footprint and will increase LVLT's scale of metro networks and broaden its overall product and service portfolio. The TWTC acquisition solidifies LVLT's metropolitan network position with the addition of 24,300 fiber route miles to LVLT's network. The transaction will create minimal network and customer overlap. LVLT indicates that there is less than a 10% overlap with TWTC's 21,000 on-net buildings providing LVLT with approximately 35,000 unique locations globally.

The investment in metropolitan facilities (which extend its on-network footprint and overall network depth) provides the company the foundation to derive strong operating leverage from its cost structure and network, enabling it to grow operating margins. Additionally, the company's improving revenue mix can further strengthen its operating leverage and contribute to higher gross and EBITDA margins.

LVLT leverage strengthened to 4.7x as of the LTM period ended June 30, 2014 reflecting a decrease from 5.2x as of year-end 2013 and 5.4x as of the LTM period ended June 30, 2014. Fitch foresees LVLT leverage on a stand-along basis will approach 4.5x by the end of 2014. Fitch continues to expect LVLT's credit profile will strengthen as the company benefits from anticipated EBITDA growth, FCF generation and cost synergies related to the TWTC acquisition. Consolidated leverage on a pro forma basis is 5.1x before consideration of any operating cost synergies and declines to 4.7x after factoring in $200 million of anticipated operating cost synergies.

Based on the company's ability to realize cost synergies in past acquisitions, Fitch has a high degree of confidence the company will successfully realize the TWTC cost synergies. LVLT expects $200 million of annualized operating synergies and an additional $40 million of capital expenditure synergies. Similar to LVLT's Global Crossing acquisition, operating synergies will be realized as the company migrates traffic over to the LVLT network and utilize the combined network to reduce third-party access costs.

Network expense reductions represent approximately 55% of the anticipated operating cost synergies. The remaining 45% of operating cost synergies will be derived from a combination of head-count and non-head count expenses. Non-head count expense synergies will be driven by the elimination of duplicate corporate costs. LVLT expects to capture 70% of the run-rate operating cost synergies within 18 months of closing. The company anticipates it will spend $170 million in integration costs, of which 60% are operating expense related and 40% are capital expense related.

The TWTC acquisition improves LVLT's ability to generate consistent levels of FCF. Fitch anticipates LVLT FCF generation during 2014 will range between 4% and 4.5% of consolidated revenues on a stand-alone basis before growing to nearly 10% of revenues by year-end 2016 on a pro forma basis. The company has generated approximately $147 million of FCF through the LTM period ended June 30, 2014. Fitch believes the company's ability to grow high-margin CNS revenues coupled with the strong operating leverage inherent in its operating profile positions the company to generate consistent levels of FCF.

Fitch believes that LVLT's liquidity position is adequate given the rating, and that overall financial flexibility is enhanced with positive FCF generation. The company's liquidity position is primarily supported by cash carried on its balance sheet, which as of June 30, 2014 totaled approximately $637 million, and expected FCF generation. LVLT does not maintain a revolver, which limits its financial flexibility in Fitch's opinion. LVLT does not have any significant maturities scheduled during the remainder of 2014. LVLT's next scheduled maturity is not until 2015 when approximately $475 million of debt is scheduled to mature or convert into equity.

RATING SENSITIVITIES

What Could Trigger a Positive Rating Action:

--Consolidated leverage maintained at 4x or lower;

--Consistent generation of positive FCF, with FCF-to-adjusted debt of 5% or greater;

--Positive operating momentum characterized by consistent core network services revenue growth and gross margin expansion.

What Could Trigger a Negative Rating Action:

--Weakening of LVLT's operating profile, as signaled by deteriorating margins and revenue erosion brought on by difficult economic conditions or competitive pressure;

--Discretionary management decisions including but not limited to execution of merger and acquisition activity that increases leverage beyond 5.5x in the absence of a credible de-leveraging plan.

Fitch affirmed the following ratings with a Positive Outlook:

LVLT:

--IDR at 'B+';

--Senior unsecured notes at 'B/RR5'.

Level 3 Financing, Inc.:

--IDR at 'B+';

--Senior secured term loan at 'BB+/RR1';

--Senior unsecured notes at 'BB/RR2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842481

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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

More Stories By Business Wire

Copyright © 2009 Business Wire. All rights reserved. Republication or redistribution of Business Wire content is expressly prohibited without the prior written consent of Business Wire. Business Wire shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Latest Stories
As many know, the first generation of Cloud Management Platform (CMP) solutions were designed for managing virtual infrastructure (IaaS) and traditional applications. But that's no longer enough to satisfy evolving and complex business requirements. In his session at 21st Cloud Expo, Scott Davis, Embotics CTO, explored how next-generation CMPs ensure organizations can manage cloud-native and microservice-based application architectures, while also facilitating agile DevOps methodology. He expla...
Smart cities have the potential to change our lives at so many levels for citizens: less pollution, reduced parking obstacles, better health, education and more energy savings. Real-time data streaming and the Internet of Things (IoT) possess the power to turn this vision into a reality. However, most organizations today are building their data infrastructure to focus solely on addressing immediate business needs vs. a platform capable of quickly adapting emerging technologies to address future ...
A strange thing is happening along the way to the Internet of Things, namely far too many devices to work with and manage. It has become clear that we'll need much higher efficiency user experiences that can allow us to more easily and scalably work with the thousands of devices that will soon be in each of our lives. Enter the conversational interface revolution, combining bots we can literally talk with, gesture to, and even direct with our thoughts, with embedded artificial intelligence, whic...
Cloud Expo | DXWorld Expo have announced the conference tracks for Cloud Expo 2018. Cloud Expo will be held June 5-7, 2018, at the Javits Center in New York City, and November 6-8, 2018, at the Santa Clara Convention Center, Santa Clara, CA. Digital Transformation (DX) is a major focus with the introduction of DX Expo within the program. Successful transformation requires a laser focus on being data-driven and on using all the tools available that enable transformation if they plan to survive ov...
Most technology leaders, contemporary and from the hardware era, are reshaping their businesses to do software. They hope to capture value from emerging technologies such as IoT, SDN, and AI. Ultimately, irrespective of the vertical, it is about deriving value from independent software applications participating in an ecosystem as one comprehensive solution. In his session at @ThingsExpo, Kausik Sridhar, founder and CTO of Pulzze Systems, discussed how given the magnitude of today's application ...
With tough new regulations coming to Europe on data privacy in May 2018, Calligo will explain why in reality the effect is global and transforms how you consider critical data. EU GDPR fundamentally rewrites the rules for cloud, Big Data and IoT. In his session at 21st Cloud Expo, Adam Ryan, Vice President and General Manager EMEA at Calligo, examined the regulations and provided insight on how it affects technology, challenges the established rules and will usher in new levels of diligence arou...
There is a huge demand for responsive, real-time mobile and web experiences, but current architectural patterns do not easily accommodate applications that respond to events in real time. Common solutions using message queues or HTTP long-polling quickly lead to resiliency, scalability and development velocity challenges. In his session at 21st Cloud Expo, Ryland Degnan, a Senior Software Engineer on the Netflix Edge Platform team, will discuss how by leveraging a reactive stream-based protocol,...
Mobile device usage has increased exponentially during the past several years, as consumers rely on handhelds for everything from news and weather to banking and purchases. What can we expect in the next few years? The way in which we interact with our devices will fundamentally change, as businesses leverage Artificial Intelligence. We already see this taking shape as businesses leverage AI for cost savings and customer responsiveness. This trend will continue, as AI is used for more sophistica...
In his session at 21st Cloud Expo, Raju Shreewastava, founder of Big Data Trunk, provided a fun and simple way to introduce Machine Leaning to anyone and everyone. He solved a machine learning problem and demonstrated an easy way to be able to do machine learning without even coding. Raju Shreewastava is the founder of Big Data Trunk (www.BigDataTrunk.com), a Big Data Training and consulting firm with offices in the United States. He previously led the data warehouse/business intelligence and B...
In his general session at 21st Cloud Expo, Greg Dumas, Calligo’s Vice President and G.M. of US operations, discussed the new Global Data Protection Regulation and how Calligo can help business stay compliant in digitally globalized world. Greg Dumas is Calligo's Vice President and G.M. of US operations. Calligo is an established service provider that provides an innovative platform for trusted cloud solutions. Calligo’s customers are typically most concerned about GDPR compliance, application p...
Digital transformation is about embracing digital technologies into a company's culture to better connect with its customers, automate processes, create better tools, enter new markets, etc. Such a transformation requires continuous orchestration across teams and an environment based on open collaboration and daily experiments. In his session at 21st Cloud Expo, Alex Casalboni, Technical (Cloud) Evangelist at Cloud Academy, explored and discussed the most urgent unsolved challenges to achieve f...
Continuous Delivery makes it possible to exploit findings of cognitive psychology and neuroscience to increase the productivity and happiness of our teams. In his session at 22nd Cloud Expo | DXWorld Expo, Daniel Jones, CTO of EngineerBetter, will answer: How can we improve willpower and decrease technical debt? Is the present bias real? How can we turn it to our advantage? Can you increase a team’s effective IQ? How do DevOps & Product Teams increase empathy, and what impact does empath...
DevOps promotes continuous improvement through a culture of collaboration. But in real terms, how do you: Integrate activities across diverse teams and services? Make objective decisions with system-wide visibility? Use feedback loops to enable learning and improvement? With technology insights and real-world examples, in his general session at @DevOpsSummit, at 21st Cloud Expo, Andi Mann, Chief Technology Advocate at Splunk, explored how leading organizations use data-driven DevOps to close th...
To get the most out of their data, successful companies are not focusing on queries and data lakes, they are actively integrating analytics into their operations with a data-first application development approach. Real-time adjustments to improve revenues, reduce costs, or mitigate risk rely on applications that minimize latency on a variety of data sources. In his session at @BigDataExpo, Jack Norris, Senior Vice President, Data and Applications at MapR Technologies, reviewed best practices to ...
"Digital transformation - what we knew about it in the past has been redefined. Automation is going to play such a huge role in that because the culture, the technology, and the business operations are being shifted now," stated Brian Boeggeman, VP of Alliances & Partnerships at Ayehu, in this SYS-CON.tv interview at 21st Cloud Expo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.