DBRS Confirms Qwest Communications Int & Affiliates at BBp
Telecom/Media/TechnologyDominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Qwest Communications International Inc. (“Qwest” or the “Company”) and its affiliated companies (see above) including its wholly owned incumbent fixed-line business, Qwest Corporation (“Qwest Corp.”). The trends remain Stable and reflect the ongoing support that Qwest Corp. provides the group; an ongoing heightened business risk profile; and a relatively stable financial risk profile for the group, with free cash flow generation improving despite debt levels remaining high.
DBRS notes that Qwest Corp.’s stable capital structure and cash flow from operations continues to support the cash needs of the rest of the group including free cash flow deficits from its long-haul business and interest costs on roughly US$10 billion in non-Qwest Corp. debt. With improved EBITDA losses in its long-haul business along with reduced capex levels, Qwest, on a consolidated basis, has improved its ability to generate free cash flow (DBRS expects roughly US$800 million for 2005). Despite ongoing revenue pressure at Qwest Corp., as a result of competition and technology substitution, this entity has been able to maintain its EBITDA levels and strong EBITDA margins (above 50%, which is healthy for an incumbent telco) through cost-cutting efforts and growth of new services such as long-distance and DSL.
While some recent reduction in access line losses has been provided by a reprieve of further competition by wholesale carriers as UNE-P rules, among others, were overturned by the Federal Communications Commission at the beginning of the year, cable operators have begun to aggressively roll out telephony services and will likely be significant players in this market going forward. The entrance of a new competitor and ongoing technology substitution is expected to continue to erode Qwest Corp.’s access line base going forward, which could pressure EBITDA as cost-cutting efforts will not be able to be maintained indefinitely.
DBRS believes that Qwest’s long-haul business will face additional challenges in this space in 2006 as AT&T Corporation and MCI, Inc. are expected to compete aggressively with the support of their new parents, SBC Communications Inc. (“SBC”) and Verizon Communications Inc. (“Verizon”). While DBRS expects that Qwest could benefit from any required dispositions as part of SBC’s and Verizon’s acquisitions, this will likely be modest.
Overall, despite some improvement in Qwest’s free cash flow deficits generated from its long-haul business, DBRS continues to believe that Qwest will need to undertake a significant change in its strategic direction in order to reduce the pressure that the long-haul business places on its incumbent telco operations. This would allow the group’s ratings to better reflect the credit strength at Qwest Corp.
Note:
p - This rating is based on public information.
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