Moody’s cuts CenturyLink, Qwest, Embarq

Moody's Investors Service said it downgraded CenturyLink, Inc.'s corporate family rating to Ba2 from Ba1 and senior unsecured debt rating to Ba3 from Ba2.

The senior unsecured ratings of Qwest Corp. and Embarq Corp. were downgraded to Ba1 from Baa3 while the ratings of all other subsidiaries were also downgraded by one notch.

As part of the action, the agency lowered the speculative grade liquidity rating to SGL-3 from SGL-2 reflecting adequate liquidity amidst a sizable $1.18 billion of Embarq notes maturing in June 2016, which the company expects to address with a combination of new debt issued at the CenturyLink parent level and utilizing its $2 billion credit facility.

The outlook for all ratings is stable.

Moody’s said the downgrade reflects the challenges CenturyLink faces in preserving a balance sheet consistent with a higher rating given downward pressure on revenues and cash flows due to the secular decline of the wireline business, lower-margin strategic services replacing higher-margin legacy revenues and growing competition.

In addition, cash taxes will increase significantly in 2016 and beyond and will likely preclude the company from generating significant free cash flow after 2017 unless the business shows a dramatic improvement in its revenue and EBITDA profile.

The expectation for significantly diminished cash flow in 2017 and 2018 is based on existing tax law including the recent five-year extension of bonus depreciation.

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