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
SYS-CON Events announced today the Kubernetes and Google Container Engine Workshop, being held November 3, 2016, in conjunction with @DevOpsSummit at 19th Cloud Expo at the Santa Clara Convention Center in Santa Clara, CA. This workshop led by Sebastian Scheele introduces participants to Kubernetes and Google Container Engine (GKE). Through a combination of instructor-led presentations, demonstrations, and hands-on labs, students learn the key concepts and practices for deploying and maintainin...
Cognitive Computing is becoming the foundation for a new generation of solutions that have the potential to transform business. Unlike traditional approaches to building solutions, a cognitive computing approach allows the data to help determine the way applications are designed. This contrasts with conventional software development that begins with defining logic based on the current way a business operates. In her session at 18th Cloud Expo, Judith S. Hurwitz, President and CEO of Hurwitz & ...
SYS-CON Events announced today that Tintri Inc., a leading producer of VM-aware storage (VAS) for virtualization and cloud environments, will exhibit at the 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. Tintri VM-aware storage is the simplest for virtualized applications and cloud. Organizations including GE, Toyota, United Healthcare, NASA and 6 of the Fortune 15 have said “No to LUNs.” With Tintri they mana...
In his keynote at 18th Cloud Expo, Andrew Keys, Co-Founder of ConsenSys Enterprise, provided an overview of the evolution of the Internet and the Database and the future of their combination – the Blockchain. Andrew Keys is Co-Founder of ConsenSys Enterprise. He comes to ConsenSys Enterprise with capital markets, technology and entrepreneurial experience. Previously, he worked for UBS investment bank in equities analysis. Later, he was responsible for the creation and distribution of life sett...
Fifty billion connected devices and still no winning protocols standards. HTTP, WebSockets, MQTT, and CoAP seem to be leading in the IoT protocol race at the moment but many more protocols are getting introduced on a regular basis. Each protocol has its pros and cons depending on the nature of the communications. Does there really need to be only one protocol to rule them all? Of course not. In his session at @ThingsExpo, Chris Matthieu, co-founder and CTO of Octoblu, walk you through how Oct...
Fact is, enterprises have significant legacy voice infrastructure that’s costly to replace with pure IP solutions. How can we bring this analog infrastructure into our shiny new cloud applications? There are proven methods to bind both legacy voice applications and traditional PSTN audio into cloud-based applications and services at a carrier scale. Some of the most successful implementations leverage WebRTC, WebSockets, SIP and other open source technologies. In his session at @ThingsExpo, Da...
SYS-CON Events announced today that ReadyTalk, a leading provider of online conferencing and webinar services, has been named Vendor Presentation Sponsor at the 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. ReadyTalk delivers audio and web conferencing services that inspire collaboration and enable the Future of Work for today’s increasingly digital and mobile workforce. By combining intuitive, innovative tec...
Major trends and emerging technologies – from virtual reality and IoT, to Big Data and algorithms – are helping organizations innovate in the digital era. However, to create real business value, IT must think beyond the ‘what’ of digital transformation to the ‘how’ to harness emerging trends, innovation and disruption. Architecture is the key that underpins and ties all these efforts together. In the digital age, it’s important to invest in architecture, extend the enterprise footprint to the cl...
SYS-CON Events announced today that Secure Channels will exhibit at the 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. The bedrock of Secure Channels Technology is a uniquely modified and enhanced process based on superencipherment. Superencipherment is the process of encrypting an already encrypted message one or more times, either using the same or a different algorithm.
Vidyo, Inc., has joined the Alliance for Open Media. The Alliance for Open Media is a non-profit organization working to define and develop media technologies that address the need for an open standard for video compression and delivery over the web. As a member of the Alliance, Vidyo will collaborate with industry leaders in pursuit of an open and royalty-free AOMedia Video codec, AV1. Vidyo’s contributions to the organization will bring to bear its long history of expertise in codec technolo...
Traditional on-premises data centers have long been the domain of modern data platforms like Apache Hadoop, meaning companies who build their business on public cloud were challenged to run Big Data processing and analytics at scale. But recent advancements in Hadoop performance, security, and most importantly cloud-native integrations, are giving organizations the ability to truly gain value from all their data. In his session at 19th Cloud Expo, David Tishgart, Director of Product Marketing ...
SYS-CON Events announced today that Bsquare has been named “Silver Sponsor” of SYS-CON's @ThingsExpo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. For more than two decades, Bsquare has helped its customers extract business value from a broad array of physical assets by making them intelligent, connecting them, and using the data they generate to optimize business processes.
If you’re responsible for an application that depends on the data or functionality of various IoT endpoints – either sensors or devices – your brand reputation depends on the security, reliability, and compliance of its many integrated parts. If your application fails to deliver the expected business results, your customers and partners won't care if that failure stems from the code you developed or from a component that you integrated. What can you do to ensure that the endpoints work as expect...
Digitization is driving a fundamental change in society that is transforming the way businesses work with their customers, their supply chains and their people. Digital transformation leverages DevOps best practices, such as Agile Parallel Development, Continuous Delivery and Agile Operations to capitalize on opportunities and create competitive differentiation in the application economy. However, information security has been notably absent from the DevOps movement. Speed doesn’t have to negat...
The Transparent Cloud-computing Consortium (abbreviation: T-Cloud Consortium) will conduct research activities into changes in the computing model as a result of collaboration between "device" and "cloud" and the creation of new value and markets through organic data processing High speed and high quality networks, and dramatic improvements in computer processing capabilities, have greatly changed the nature of applications and made the storing and processing of data on the network commonplace.