LEVEL 3 (LVLT)

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Fitch Rates Level 3 Financing`s $600MM Sr. Notes `B/RR1`; Affirms IDR at `CCC`; Outlook Positive

October 26, 2006 12:07:20 (ET)


CHICAGO, Oct 26, 2006 (BUSINESS WIRE) -- Fitch assigns a rating of 'B/RR1' to Level 3 Financing, Inc.'s issuance of $600 million of 9.25% senior notes due 2014. In addition, Fitch affirms the 'CCC' Issuer Default Rating (IDR) and each issue rating for Level 3 Communications, Inc. (LVLT, Trade) (Level 3) and Level 3 Financing, Inc. The Rating Outlook is Positive.

The Positive Rating Outlook continues to reflect Fitch's belief that the company's acquisitions, including the recently announced Broadwing Corporation (Broadwing) acquisition, gives Level 3 a firm path, if successfully integrated, toward de-leveraging its credit profile and achieving positive free cash flow in 2008. The timing of an upgrade of Level 3's IDR is linked to the company's ability to improve free cash flow, materially reduce leverage, generate positive organic revenue growth and improve margins. Additionally, the company will need to maintain liquidity and financial flexibility.

The new notes will constitute purchase money indebtedness under the indentures of Level 3. The net proceeds can be used for acquisitions or expansion of the company's infrastructure. With this offering, the company will have a fully drawn $730 million secured term loan facility due 2011 as well as $1.8 billion of senior unsecured notes at Level 3 Financing. Fitch expects that the proceeds from this new offering will be in part used for the company's acquisition of Broadwing. The total cash requirement in this transaction is $744 million, but only $394 million when netted against second quarter 2006 outstanding cash at Broadwing. The Broadwing acquisition is expected to close in first quarter 2007. Level 3 continues to maintain strong liquidity and finished third quarter 2006 with $731 million of cash and $509 million of marketable securities. Level 3's current maturity schedule is $2 million in 2007, $138 million in 2008 and $362 million in 2009.

Level 3's third quarter earnings results showed strong year-over-year revenue and operating EBITDA growth in core communications services due to both organic growth as well as contributions from acquisitions. Integration and capital expenditures are expected to remain high for the next couple of years, but with a steady trend of strengthening operating and free cash flow. Gross margins continued to strengthen in the third quarter reaching 57% and this trend should continue as the low margin SBC contract contribution continues to reduce and acquisitions are integrated. Fitch believes that acquisition activity at Level 3 will be curtailed due to the outstanding amount of integration effort which is currently present. Fitch also expects that Level 3 could take advantage of opportunities to reduce interest expense in order to strengthen its credit profile on a going forward basis. Opportunities to reduce interest expense could include the ability to convert debt to equity, which is present at $1.2 billion of senior convertible notes that can convert at less than $4 per share. The company also has the ability to call over $600 million of high coupon debt due in 2010, in March 2007.

The following ratings are affirmed with a Positive Outlook:

Level 3 Communications, Inc.

--IDR 'CCC';

--Senior unsecured debt 'CCC-/RR5';

--Subordinated debt 'CC/RR6'.

Level 3 Financing, Inc.:

--IDR 'CCC';

--Senior secured term loan 'B/RR1';

--Senior unsecured debt 'B/RR1'.

Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at http://www.fitchratings.com/recovery.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

SOURCE: Fitch Ratings


Fitch Ratings
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David Peterson, 312-368-3177 (Chicago)
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