Fitch Affirms CenturyTel's and Embarq's Ratings; Outlook Stable
2009-06-26 22:20:03 -
Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of CenturyTel, Inc. (CenturyTel) and Embarq Corporation (Embarq) at 'BBB-'.
A complete list of ratings being affirmed is at the end of this release.
The Rating Outlook is Stable for all ratings.
The action reflects the anticipated close of CenturyTel's acquisition of Embarq on July 1, 2009, following the receipt of all regulatory approvals. The company will operate under the name CenturyLink after the close of the merger. The merger was announced on Oct. 27, 2008.
Fitch believes that CenturyTel's credit protection metrics over a two-year rating horizon will remain investment grade, and will be supported by synergies expected to be realized over the next three years as the company integrates Embarq into its operations. Fitch estimates pro forma debt to EBITDA was 2.1 times (x) on March 31, 2009 on a last twelve month (LTM) basis. The company has not set specific leverage targets for its post-merger financial strategy, but management states that the company's objective is to maintain investment grade ratings.
The company's dividend policy will reflect the payout of approximately 50% of free cash flow, a level similar to the recent policies of the two companies. Fitch generally views leverage of 3.0x or below and a dividend payout of free cash flow no greater than 55% as being the threshold for an investment-grade rating for a rural local exchange carrier with flat revenue growth prospects and limited competitive pressure. Fitch believes that the post-merger company will operate within these measures during this rating horizon.
The combination results in a large rural local exchange carrier, with 7.5 million access lines, more than 2 million broadband customers and operations in 33 states, with pro forma revenue of $8.5 billion and EBITDA of more than $3.9 billion. Fitch believes the enhanced scale of the company provides greater flexibility as it expands high-speed data service availability and as it considers such strategic growth areas as Internet protocol television (IPTV) and wireless data services.
Furthermore, the combined company will have greater financial flexibility to manage through upcoming regulatory reforms (universal service funding and intercarrier compensation).
The company believes it can achieve approximately $400 million of annual operating cost and expense synergies within the first three years of the close of the transaction. The largest portion of the savings ($300 million) consist of operating cost savings, which arise from the elimination of duplicate headquarters and corporate costs, increased network and operational efficiencies, increased purchasing power, and savings in IT support and advertising. Fitch's assumptions incorporate moderately lower expectations for operating cost synergies than the company assumes, as there is a moderate level of execution risk, and Fitch has not assumed any revenue synergies (the company estimates $75 million). CenturyTel also expects to incur approximately $275 million in integration expenses.
After the close of the transaction, Embarq's shareholders will own approximately 66% of the company, and CenturyTel's shareholders will own approximately 34%. Eight of the 15 member board of directors will come from the board of CenturyTel, and seven from the board of Embarq.
CenturyTel had approximately $3.022 billion in total debt outstanding and its balance sheet reflected approximately $61 million in cash on March 31, 2009. CenturyTel also has a $728 million, five-year revolving credit facility that matures in December 2011. On March 31, 2009, there was approximately $276 million outstanding on the revolving facility.
The principal financial covenants in the credit facility limit debt-to-EBITDA for the past four quarters to no more than 4.0x, and EBITDA-to-interest plus preferred dividends (with the terms as defined in the agreement) to no less than 1.5x.
Embarq had $5.29 billion in debt outstanding and approximately $95 million in cash on March 31, 2009. Embarq's undrawn credit facility will be reduced to $800 million from $1.5 billion, and remain in place until May 2011, per the terms of a January 2009 amendment that goes into effect upon the merger. The primary financial covenant in the amended facility limits Embarq's leverage to no more than 3.25x.
Fitch believes CenturyTel will have adequate financial flexibility after the close of the merger to manage upcoming maturities owing to the credit facilities and free cash flow. Free cash flow for the LTM ending March 31, 2009 was approximately $292 million for CenturyTel and $777 million for Embarq. After the July 1, 2009 close of the merger, the next significant maturities are not until 2010, when approximately $500 million in debt comes due. CenturyTel also has a universal shelf registration for the issuance of debt and equity securities available, as well as a $1.5 billion commercial paper program. Commercial paper borrowings are effectively limited to the amount available on its credit facility.
Fitch affirms the following ratings with a Stable Outlook.
CenturyTel
--Long-term Issuer Default Rating (IDR) at 'BBB-';
--Senior unsecured revolving credit facility at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Short-Term IDR at 'F3';
--Commercial paper at 'F3'.
Embarq
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Bank facility at 'BBB-'.
Carolina Telephone & Telegraph (CT&T)
--IDR at 'BBB-';
--Debentures at 'BBB-'.
Embarq - Florida, Inc. (EFL)
--IDR at 'BBB-';
--First mortgage bonds 'BBB'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, ' www.fitchratings.com : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww .. '.
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 RatingsChicagoJohn Culver, CFA, 312-368-3216David
Peterson, 312-368-3177New YorkCindy Stoller, 212-908-0526
(Media Relations) cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com
